PRINCIPLES   OF 
INDUSTRIAL  ENGINEERING 


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PRINCIPLES 

OF 

INDUSTRIAL  ENGINEERING 


BY 
CHARLES  BUXTON  GOING,  M.Sc. 

MANAGING  EDITOR  OF  THE  ENGINEERING  MAGAZINE, 
AUTHOR  OF  "METHODS  OF  THE  SANTA  FE,"  ETC., ETC. 


FIRST  EDITION 
SECOND    IMPRESSION 


McGRAW-HILL  BOOK   COMPANY 

239  WEST  39TH  STREET,  NEW  YORK 

6  BOUVERIE  STREET,  LONDON,  E.G. 

1911 


H-F'i'. 

F? 

Engineering 
Library 


COPYRIGHT,  1911,  BY  THE 
McGRAW-HILL  BOOK  COMPANY 


PREFACE 

The  subject  matter  of  this  book  is  substantially  the  text 
of  a  series  of  lectures  prepared  under  the  auspices  of  the 
Department  of  Mechanical  Engineering  of  Columbia  Uni- 
versity, for  delivery  to  senior  students.  As  here  presented, 
it  takes  the  form  evolved  from  three  years'  experience  in 
the  class-room  at  Columbia,  somewhat  modified  from  the 
manner  of  the  lecture  platform,  and  adapted  to  meet  the 
needs  of  a  more  general  study  as  discovered  by  contact  with 
non-technical  audiences  at  Harvard  and  the  New  York 
University,  and  by  many  inquiries  addressed  to  the  Editorial 
Department  of  The  Engineering  Magazine. 

The  original  purpose  when  the  work  was  undertaken  at 
Columbia  in  1908-09  was  to  lay  the  foundations  for  a  com- 
posite course  in  Works  Management,  in  which  several 
eminent  practitioners  should  follow  with  successive  portions 
of  the  main  structure.  Experiment  showed,  however,  that 
the  better  plan  was  to  give  these  preparatory  essays  rather 
the  character  of  a  primary  triangulation,  covering  the  whole 
province,  though  it  might  be  only  in  very  broad  outline. 
Further  detail  might  then  be  filled  in  sectionally,  as  ex- 
pedient, by  specialists,  each  in  his  own  subject.  Thus,  the 
discussion  now  reduced  to  printed  chapters,  was  to  be  co- 
ordinated with  certain  lectures  by  Charles  U.  Carpenter,  on 
factory  and  commercial  organization;  by  Harrington  Emer- 
son, on  the  philosophy  of  efficiency;  by  H.  L.  Gantt,  on 
scientific  management;  by  R.  T.  Lingley,  on  factory  ac- 
counting. It  has  not  seemed  feasible  to  co-ordinate  these 
other  lectures  here  so  that  the  volume  might  present  the  en- 
tire argument.  Several  of  the  collaborators  have  published 


254498 


VI  PREFACE 

independently  even  fuller  expositions  of  their  thought  on  the 
special  topics,  and  reference  to  these  will  be  found  through- 
out the  book. 

This  volume  is  therefore  put  forth  to  serve  in  a  wider 
sphere  the  same  function  it  served  in  the  Columbia  course  — 
that  of  affording  a  carefully  chosen  standpoint  from  which 
to  view  the  principal  factors  in  the  industrial  problem,  their 
relations  and  influence,  and  the  properties  and  efficacies  of 
the  more  important  solutions  so  far  proposed. 

The  scale,  as  already  said,  is  broad.  The  study  is 
directed  almost  wholly  to  the  discovery  and  definition  of 
ideals  and  principles,  or  in  some  cases  of  institutions ;  very 
little  attempt  is  made  at  the  description  of  methods  and  de- 
vices. The  book  advances  no  claim  of  exhaustiveness,  but 
only  of  an  earnest  effort  to  maintain  a  just  scale  of  propor- 
tion, and  to  trace  an  outline  of  the  province  it  undertakes 
to  delimit,  by  which  the  student  of  industrial  engineering 
may  safely  orient  himself  in  his  further  and  closer  examina- 
tion of  the  subject. 

C.  B.  G. 

May,    1911. 


CONTENTS 

CHAPTER  I 

PAGE 

THE  ORIGIN  OF  THE  INDUSTRIAL  SYSTEM. 

Industrial  Engineering  Defined  —  Its  Composite  Character  — 
Its  Two  Phases,  Analytical  and  Synthetic  —  Industrial  En- 
gineering Deals  with  Machinery,  Materials,  Methods,  Man- 
agement, Men,  Markets  —  It  is  Concerned  with  the 
Equivalency  between  Expenditure  and  Return  —  Two 
Compelling  Forces  toward  Cost  Reduction,  Competition 
and  Efficiency  Effort  —  Industrial  Progress  Dependent  on 
Three  Factors,  Technical,  Commercial,  and  Psychical  — 
These  Factors  Demonstrated  by  the  Rise  of  the  Industrial 
System .  i 

CHAPTER  II 

REFLEX  INFLUENCES  OF  THE  INDUSTRIAL  SYSTEM. 

Replacement  of  Hand  Labor  by  Machinery  and  Power  —  Re- 
sultant Increase  in  the  Size  of  the  Industrial  Unit  —  This 
Aggregation  Involved  Specialization  and  Standardization  — 
Industrial  and  Sociological  Consequences  of  Aggregation  — 
The  Trust  and  the  Union  Inevitable  —  Hope  for  Their 
Betterment  —  Specialization  and  Its  Tendencies  —  Stand- 
ardization and  Its  Effects  —  The  Threatening  Evils  of 
Overstandardization  —  Labor  .  Relations  as  Affected  by 
These  Three  Great  Influences  —  Dangers  and  Their  Prom- 
ising Remedies  —  The  Major  Difficulties  of  the  Manufac- 
turing Problem  —  The  Approach  to  Their  Solution 
Through  Organization 19 

CHAPTER  III 

PRINCIPLES  OF  INDUSTRIAL  ORGANIZATION. 

Problems  of  Manufacturing  Studied  by  a  Concrete  Example 
—  The  Necessity  for  Organization  Shown  —  What  Organ- 
ization Is  —  Two  Great  Organization  Principles,  Line  and 
Staff  —  Line  and  Staff  Defined  and  Illustrated  —  Indus- 

vii 


viil  CONTENTS 

PAGE 

trial  Organizations  Usually  Weak  in  Staff  Co-operation  — 
The  Defects  of  All-Line  Organization  Pointed  Out  — 
Scientific  Management  Provides  a  Proper  Co-ordination  of 
Line  and  Staff  —  The  Two  Great  Schools  of  Scientific 
Management  Typified  by  F.  W.  Taylor  and  Harrington 
Emerson  —  A  Summary  of  Their  Doctrines  —  An  Analysis 
of  Ordinary  Industrial  Organization  —  How  the  Control 
of  Various  Factors  of  Production  is  Usually  Systematized  — 
The  Conventional  Methods  of  Handling  Management,  Ma- 
terials, Machinery,  Men,  Methods,  Money 39 

CHAPTER  IV 

FORMS  OF  INDUSTRIAL  OWNERSHIP. 

The  Legal  Status,  Powers,  Responsibilities,  and  Limitations  of 
the  Several  Types  —  Individual  Ownership  —  The  Part- 
nership or  Firm  —  The  Joint-Stock  Association  —  The  Cor- 
poration—  Corporate  Capitalization  and  Liability  —  Cor- 
poration Management  —  The  Organization  of  a  Production 
Department  —  How  the  Manufacturing  Order  Originates 
—  Production  Orders,  Job  Tickets,  Material  Tickets  — 
The  Cycle  of  Movement  from  Raw  Stores  to  Finished 
Stock  —  The  Stores  Department  and  Stores-Keeping  —  The 
Selling  Department  .  .  .  .,.'..  .  .  .  59 

CHAPTER  V 

THE  NATURE  OF  EXPENSE. 

The  Cycle  of  Manufacture  Reviewed  —  The  Elements  of 
Cost  —  Productive  and  Non-productive  Outlay  —  The 
Manufacturing  Proposition  in  Terms  of  Labor,  Materials 
and  Expense  —  Expense  from  the  Accountant's  Point  of 
View  —  The  Problem  of  Distribution  —  What  Expense 
Distribution  Is  —  Why  Correct  Distribution  is  Impor- 
tant—  Why  It  Is  Difficult  —  Shop  Expense  and  General 
Expense  —  How  Expense  Accrues  —  Practical  Examples  — 
Constant  and  Variable  Expense  —  The  Variation  of  Ex- 
pense Ratio  with  Changing  Volume  of  Business  ...  79 

CHAPTER  VI 

DISTRIBUTION  OF  EXPENSE. 

The  Underlying  Idea  of  Expense  Distribution  —  Use  of  Visi- 
ble Elements  Such  as  Machinery,  Labor,  or  Time,  for  Pro- 
rating the  Invisible  Element  of  Expense  —  The  Five  Car- 


CONTENTS  IX 

PAGE 

dinal  Methods  of  Shop-Expense  Distribution  —  Distribution 
by  Material  and  Its  Limitations  —  The  Percentage-on- 
Wages  Method  —  Its  Wide  Applications  and  Its  Defects  — 
The  Man-Hour  Plan  and  Its  Distinctive  Characteristics  — 
The  Machine-Hour  Method ;  How  It  is  Put  into  Effect  — 
The  Supplementary  Rate  —  The  Problem  of  the  Penalized 
Job  —  Expense  Distribution  by  Production  Factors  —  Dis- 
tribution of  General  Expense  —  Depreciation  —  Its  Nature 
and  Treatment  —  Expense  Distribution  Necessary  to  Cost 
Finding  —  Its  Usefulness  in  Cost  Reduction  ....  97 

CHAPTER  VII 

LABOR.     THE  PRIMARY  WAGE  SYSTEMS. 

Labor  as  an  Element  in  Manufacturing  Costs  —  Its  Function 
in  Multiplying  or  Dividing  Other  Costs  —  Reasons  for 
Stimulating  Production  by  High  Wages  —  The  Unfavor- 
able Results  of  Collective  Bargaining  —  Individual  Effi- 
ciency Reward  as  a  Countercheck  —  The  Two  Fundamental 
Methods  of  Wage  Payment;  Day  Pay  and  Piece  Rates  — 
All  Other  Systems  are  Combinations  of  These  Two  —  The 
Day- Wage  System;  Its  Disadvantages  —  The  Piece-Rate 
System;  Its  Promise  and  Why  the  Promise  is  Not  Realized 
—  Injurious  Results  of  Unscientific  Rate  Setting  —  The 
Inherent  Fault  of  Principle  in  Piece-Rate  Payment  —  The 
Contract  Plan  of  Paying  Labor  —  The  Halsey  Premium 
System  and  Its  Practical  Use  —  Its  Advantages  and  Disad- 
vantages—  The  Rowan  Premium  Plan 113 


CHAPTER  VIII 

LABOR.     PHILOSOPHIES  OF  MANAGEMENT. 

Philosophies  of  Management  —  Wage  Methods  Only  One 
Feature  in  Management  Policy  —  The  Taylor  Differential 
Piece-Rate  —  The  Elements  of  Its  Underlying  Theory  — 
Its  Use  in  Practice  —  The  Gantt  Bonus  Method ;  An  Evo- 
lution from  the  Differential  Piece-Rate  —  Its  Organic  Dif- 
ferences from  the  Differential  Piece-Rate  —  Contrast  be- 
tween the  Philosophies  of  Gantt  and  Halsey  —  The  Emer- 
son Efficiency  or  Individual-Effort  System  —  Its  Peculiar 
Features  —  How  Efficiency  is  Calculated  —  Apportionment 
of  Bonus  According  to  Efficiency  —  Gilbreth's  Theory  of 
Motion  Study  —  The  Gilbreth  Wage  Methods  —  Carpen- 
ter's Policies  of  Labor  Management  —  Profit-Sharing  — 
Co-operative  Stockholding —  Welfare  Work  .  .  .  .133 


X  CONTENTS 

PAGE 

CHAPTER  IX 
MATERIALS. 

Material  Represents  the  Crystallized  Labor  of  Preceding 
Operations  —  Illustrations  from  Familiar  Cases  —  The 
Varying  Ratio  of  Material  to  Labor  and  Expense  —  Ma- 
terial as  a  Physical  Nucleus  of  Industrial  Values  —  It  is 
More  Potential  for  Good  or  Harm  Than  the  Money  It 
Represents  —  Ordinary  Industrial  Practice  is  Harmfully 
Careless  of  Material  —  The  Purchasing  Department  — The 
Ordinary  Routine  of  Storeskeeping  —  Duties  of  the  Stores 
Department  —  Standardized  Listing  of  Stock  —  Systematic 
Arrangement  of  Stock  —  Stock  Records  —  Maximum  and 
Minimum  Limits  —  The  Influence  of  Materials  on  Manu- 
facturing-Plant Design 155 


THE  ORIGIN  OF  THE  INDUSTRIAL  SYSTEM 


PRINCIPLES    OF    INDUSTRIAL 
ENGINEERING 

CHAPTER  I 
THE  ORIGIN  OF  THE  INDUSTRIAL  SYSTEM 

INDUSTRIAL  engineering  is  the  formulated  science  of 
management.  It  directs  the  efficient  conduct  of  manufac- 
turing, construction,  transportation,  or  even  commercial  en- 
terprises —  of  any  undertaking,  indeed,  in  which  human  labor 
is  directed  to  accomplishing  any  kind  of  work.  It  is  of  very 
recent  origin.  Indeed,  it  is  only  just  emerging  from  the 
formative  period  —  has  only  just  crystallized,  so  to  speak, 
from  the  solution  in  which  its  elements  have  been  combin- 
ing during  the  past  one  or  two  decades.  The  conditions 
that  have  brought  into  being  this  new  applied  science,  this 
new  branch  of  engineering,  grew  out  of  the  rise  and  enor- 
mous expansion  of  the  manufacturing  system.  This  phe- 
nomenon of  the  evolution  of  a  new  applied  science  is  like 
those  that  have  been  witnessed  in  other  fields  of  human 
effort  when  some  great  change,  internal  or  external,  forced 
them  from  a  position  of  very  minor  importance  into  that  of 
a  major  service  to  civilization.  Columbus  could  blow 
across  the  ocean  in  a  caravel  to  an  unknown  landfall;  but 
before  a  regular  packet  service  could  be  run  between  New 
York  and  Liverpool  navigation  must  be  made  a  science.  It 
has  drawn  upon  older,  purer  sciences  for  its  fundamental 
data  —  upon  astronomy,  meteorology  and  hydrography,  and 
later  upon  marine  steam  engineering  and  electricity;  but  out 

i 


2  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

of  all  these  it  has  fused  a  distinct  body  of  science  of  its  own, 
by  which  new  practitioners  can  be  trained,  by  which  cer- 
tainty, safety  and  efficiency  of  performance  may  be  sub- 
stantially assured. 

Navigation  is  not  merely  making  correct  observation  of 
the  sun  and  stars,  of  lights  and  beacons,  of  log  and  lead; 
it  is  not  merely  directing  the  propelling  and  steering  ma- 
chinery; it  is  not  merely  knowledge  of  courses  and  dis- 
tances; it  is  not  merely  storm  strategy.  It  is  the  co-ordina- 
tion of  all  these  in  handling  the  equipment  provided  by  the 
marine  engineer  and  naval  architect,  through  the  work  of  a 
crew  of  men. 

In  somewhat  like  manner,  industrial  engineering 1  has 
drawn  upon  mechanical  engineering,  upon  economics,  soci- 
ology, psychology,  philosophy,  accountancy,  to  fuse  from 
these  older  sciences  a  distinct  body  of  science  of  its  own.  It 
does  not  consist  merely  in  the  financial  or  commercial  direc- 
tion, nor  merely  in  running  the  power-plant  or  machinery, 
nor  merely  in  devising  processes  or  methods.  It  consists  in/ 
co-ordinating  all  these  things,  and  others,  in  the  direction  of 
the  work  of  operatives,  using  the  equipment  provided  by 
the  engineer,  machinery  builder,  and  architect. 

The  cycle  of  operations  which  the  industrial  engineer  di- 
rects is  this:  Money  is  converted  into  raw  materials  and 
labor;  raw  materials  and  labor  are  converted  into  finished 
product  or  services  of  some  kind;  finished  product,  or  serv- 
ice, is  converted  back  into  money.  The  difference  between 
the  first  money  and  the  last  money  is  (in  a  very  broad  sense) 
the  gross  profit  of  the  operation.  Part  of  this  is  absorbed 
in  the  intervening  conversions,  or,  in  other  words,  in  the 
operations  of  purchase,  manufacture,  sale,  and  the  adminis- 
tration connected  with  each. 

1  A  systematic  presentation  of  the  field  of  industrial  engineering  from 
an  entirely  different  point  of  view  and  by  a  very  different  method  will 
be  found  in  "  Factory  Organization  and  Administration,"  by  Prof.  Hugo 
Diemer;  McGraw-Hill  Book  Co. 


THE    INDUSTRIAL    SYSTEM  3 

Now  the  starting  level  (that  is,  the  cost  of  raw  materials 
and  labor)  and  the  final  level  (the  price  obtainable  for  fin- 
ished product) —  these  two  levels  are  generally  fixed  by  com- 
petition and  market  conditions,  as  surely  and  as  definitely  as 
the  differences  in  level  between  intake  and  tail  race  are 
fixed  in  a  water  power.  Hence  our  profit,  like  the  energy 
delivered  at  the  bus  bars,  varies  not  only  with  the  volume 
passing  from  level  to  level,  but  with  the  efficiency  of  the 
conversions  between  these  levels.  In  the  hydroelectric 
power-plant,  the  conversion  losses  are  hydraulic,  mechanical 
and  electrical.  In  any  industrial  enterprise  the  conversion 
losses  are  commercial,  manufacturing,  administrative.  It  is 
with  the  efficiency  of  these  latter  conversions  that  industrial 
engineering  is  concerned. 

The  industrial  engineer  may  have  in  his  organization  staff 
many  mechanical  engineers  superintending  special  depart- 
ments —  design  or  construction,  or  the  power-plant,  for  in- 
stance —  while  his  own  duty  is  to  co-ordinate  all  these  factors, 
and  many  more,  for  the  one  great,  central  purpose  of  effi- 
cient and  economical  production.  He  is  concerned  not  only 
with  the  direction  of  the  great  sources  of  power  in  nature, 
but  with  the  direction  of  these  forces  as  exerted  by  ma- 
chinery, working  upon  materials,  and  operated  by  men.  It 
is  the  inclusion  of  the  economic  and  the  human  elements  es- 
pecially that  differentiates  industrial  engineering  from  the 
older  established  branches  of  the  profession.  To  put  it  in 
another  way :  The  work  of  the  industrial  engineer  not  only 
covers  technical  counsel  and  superintendence  of  the  technical 
elements  of  large  enterprises,  but  extends  also  over  the  man- 
agement of  men  and  the  definition  and  direction  of  policies 
in  fields  that  the  financial  or  commercial  man  has  always 
considered  exclusively  his  own. 

In  general,  the  work  of  the  industrial  engineer,  or,  to  use 
a  yet  more  inclusive  term  which  is  coming  into  general  use, 
the  efficiency  engineer,  has  two  phases.  The  first  of  these 


4  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

is  analytical  —  we  might  almost  call  it  passive  to  distinguish  ^ 
it  from  the  second  phase,  which  is  synthetic,  creative,  and 
most  emphatically  active.  The  analytical  phase  of  indus- 
trial or  efficiency  engineering  deals  merely  with  the  things 
that  already  exist.  It  examines  into  facts  and  conditions, 
dissects  them,  analyzes  them,  weighs  them,  and  shows  them 
in  a  form  that  increases  our  useful  working  knowledge  of 
the  industry  with  which  we  have  to  deal.  To  this  province 
of  industrial  engineering  belong  the  collection  and  tabula- 
tion of  statistics  about  a  business,  the  accurate  determination 
and  analysis  of  costs,  and  the  comparison  of  these  costs  with 
established  standards  so  as  to  determine  whether  or  not  they 
are  normal.  To  this  sort  of  work  Harrington  Emerson  ap- 
plies the  term  "  assays,'.'  speaking  of  labor  assays,  expense 
assays,  etc.,  and  maintaining  (with  good  reason)  that  the 
expert  efficiency  engineer  can  make  determinations  of  this 
sort  as  accurately,  and  compare  them  with  standards  as  in- 
telligently, as  an  assayer  can  separate  and  weigh  the  metal 
in  an  ore.  To  this  province  belong  also  such  matters  as 
systematic  inquiry  into  the  means  and  methods  used  for  re- 
ceiving, handling,  and  issuing  materials,  routing  and  trans- 
porting these  materials  in  process  of  manufacture,  the  gen- 
eral arrangement  of  the  plant,  and  the  effect  of  this 
arrangement  upon  economy  of  operation.  To  this  province 
belongs,  also,  the  reduction  of  these  data  and  other  data  to 
graphic  form,  by  which  their  influence  and  bearing  upon 
total  result  are  often  made  surprisingly  and  effectively  man- 
ifest. It  is  wonderful  how  much  new  knowledge  a  man 
may  gain  about  even  a  business  with  which  he  thinks  he  is 
thoroughly  familiar  by  plotting  various  sorts  of  data  on 
charts  where,  say,  the  movement  of  materials  back  and 
forth,  or  the  rise  of  costs  under  certain  conditions,  are  trans- 
lated immediately  into  visible  lines  instead  of  being  put  into 
the  indirect  and  rather  unimpressive  form  of  long  descrip- 
tions or  tabular  columns  of  figures. 


THE    INDUSTRIAL    SYSTEM  5 

The  great  purpose  and  value,  indeed,  of  these  analytical 
functions  of  industrial  engineering  is  that  they  visualize  the 
operations  of  the  business  and  enable  us  to  pick  out  the  weak 
spots  and  the  bad  spots  so  that  we  can  apply  the  right  rem- 
edies and  apply  them  where  they  are  needed.  They  make 
us  apprehend  the  presence  and  the  relative  importance  of 
elements  which  would  otherwise  remain  lost  in  the  mass,  un- 
detected by  our  unaided  senses. 

The  second  phase  of  industrial  engineering  —  the  active, 
creative  and  synthetic  phase, —  goes  on  from  this  point  and 
effects  improvements,  devises  new  methods  and  processes, 
introduces  economies,  develops  new  ideas.  Instead  of 
merely  telling  us  what  we  have  been  doing  or  what  we  ar 
doing,  it  makes  us  do  the  same  thing  more  economically  or 
shows  us  how  to  do  a  new  thing  that  is  better  than  the  old. 
To  this  part  of  works  management  belongs,  for  example, 
the  rearrangement  of  manufacturing  plants,  of  depart- 
ments,  or  of  operations  so  as  to  simplify  the  process  of  man- 
ufacture; the  correction  of  inefficiencies,  whether  of  power, 
transmission,  equipment  or  labor;  the  invention  and  appli- 
cation of  new  policies  in  management  which  make  the  ideals 
and  purposes  of  the  head  operate  more  directly  upon  the 
conduct  of  the  hands ;  the  devising  of  new  wage  systems  by 
which,  for  example,  stimulus  of  individual  reward  propor- 
tioned to  output  makes  the  individual  employee  more  pro- 
ductive. 

The  exercise  of  these  functions,  whether  analytical  or 
creative,  by  the  industrial  engineer  or  the  efficiency  engineer, 
requires  that  he  shall  have  technical  knowledge  and  scien- 
tific  training,  but  in  somewhat  different  form  from  the  equip- 
ment of  the  mechanical  engineer  and  somewhat  differently 
exercised. 

Industrial  engineering  deals  with  machinery;  but  not  so 
much  with  its  design,  construction,  or  abstract  economy, 
which  are  strictly  mechanical  considerations,  as  with  selec- 


6  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

tion,  arrangement,  installation,  operation  and  maintenance, 
and  the  influence  which  each  of  these  points  or  all  of  them 
together  may  exert  upon  the  total  cost  of  the  product  which 
that  machinery  turns  out. 

It  deals  with  materials,  but  not  so  much  with  their  me- 
chanical and  physical  constants,  which  are  strictly  technical 
considerations,  as  with  their  proper  selection,  their  standard- 
ization, their  custody,  transportation,  and  manipulation. 

It  deals  very  largely  with  methods;  but  the  methods  with 
which  it  is  particularly  concerned  are  methods  of  performing 
work;  methods  of  securing  high  efficiency  in  the  output  of 
machinery  and  of  men;  methods  of  handling  materials,  and 
establishing  the  exact  connection  between  each  unit  handled 
and  the  cost  of  handling;  methods  of  keeping  track  of  work 
in  progress  and  visualizing  the  result  so  that  the  manager 
of  the  works  may  have  a  controlling  view  of  everything  that 
is  going  on ;  methods  of  recording  times  and  costs  so  that 
the  efficiency  of  the  performance  may  be  compared  with 
known  standards;  methods  of  detecting  causes  of  low  effi- 
ciency or  poor  economy  and  applying  the  necessary  remedies. 

It  deals  with  management  —  that  is,  with  the  executive 
and  administrative  direction  of  the  whole  dynamic  organ- 
ization, including  machinery,  equipment  and  men. 

It  deals  with  men  themselves  and  with  the  influences  which 
stimulate  their  ambition,  enlist  their  co-operation  and  insure 
their  most  effective  work. 

It  deals  with  markets,  with  the  economic  principles  or 
laws  affecting  them  and  the  mode  of  creating,  enlarging,  or 
controlling  them. 

The  most  important  elements  of  industrial  engineering 
are  summed  up  in  this  alliterative  list  —  machinery,  mate- 
rials, methods,  management,  men  and  markets.  And  these 
six  elements  are  interpreted  and  construed  by  the  aid  of  an- 
other factor  whose  name  also  begins  with  m  —  Money. 
Money  supplies  the  gauge  and  the  limit  by  which  the  other 


THE    INDUSTRIAL    SYSTEM  7 

factors  are  all  measured  and  adjusted.  This  of  course  is  true 
not  alone  of  industrial  engineering;  the  civil  engineer,  the  me- 
chanical engineer,  the  electrical  engineer,  the  mining  en- 
gineer, each  and  all  must  normally  be  expected  to  make 
money  for  his  employer  or  client.  One  of  the  simplest  prin- 
ciples of  the  profession,  but  one  which  the  mere  technician 
sometimes  finds  it  hardest  to  keep  in  mind,  is  that  the  pri- 
mary purpose  for  which  the  engineer  is  usually  engaged  is 
to  direct  the  employment  of  capital  so  that  it  may  pay  back 
dividends  to  its  owners.  And  while  this  is  generally  true 
of  all  engineering  employment,  it  is  most  particularly,  con- 
tinuously and  everlastingly  true  of  works  management.  It 
is  much  easier  to  conceive  of  the  civil  engineer  or  the  me- 
chanical engineer  being  retained  to  carry  out  some  piece  of 
work  in  which  scientific  accuracy  is  demanded  regardless  of 
cost,  than  it  is  to  conceive  of  a  shop  superintendent  being 
directed  or  even  permitted  to  manufacture  a  line  of  product 
regardless  of  cost. 

It  is  the  ever-present  duty  of  the  industrial  engineer,  of 
the  efficiency  engineer,  to  study  constantly,  and  to  study  con- 
stantly harder  and  harder,  the  question  of  equivalency  be-, 
tween  the  dollars  spent  and  the  things  secured.  It  is  not 
sufficient,  for  example,  for  him  to  know  that  a  machine  sold 
for  $100  costs  $75  to  make.  This  may  be  a  very  good 
profit  and  the  machine  itself  may  be  an  excellent  one. 
There  may  be  vouchers  honestly  connecting  every  cent  of 
the  $75  cost  with  some  actual  item  of  material,  labor,  or 
expense.  Nevertheless,  the  industrial  engineer  must  con- 
stantly look  back  of  these  figures  to  see  whether  by  some 
change  of  machinery,  some  modification  of  materials,  some 
alteration  of  methods,  some  higher  skill  in  management, 
some  stimulus  to  the  men,  he  can  make  the  machine  cost  less 
than  $75  for  its  manufacture,  or  can  make  it  a  better  ma- 
chine for  the  same  cost,  or  perhaps  can  do  both. 

In  short,  the  industrial  engineer  is  under  unending  and 


8  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

unremitting  pressure  to  secure  a  true  proporti.on  between 
what  he  spends  and  what  he  gets.  And  the  proportion  is 
never  true  so  long  as  the  smallest  opportunity  remains  for 
getting  more  in  return  for  what  he  spends,  or  for  spending 
less  in  payment  for  what  he  gets.  The  function  of  the  in- 
dustrial engineer  is  to  determine  with  the  utmost  possible 
wisdom  and  insight  whether  and  where  any  disproportion 
between  expenditure  and  return  exists,  to  find  the  amount  of 
the  disproportion,  the  causes  of  such  disproportion,  and  to 
apply  effective  remedies. 

The  forces,  causing  this  pressure  for  the  reduction  of  cost 
are  principally  two.  The  older  and  cruder  is  competition. 
The  later  and  larger,  which  in  itself  carries  the  answer  to 
competition,  is  the  effort  toward  efficiency. 

Competition  was  not  created  by  the  manufacturing  sys- 
tem. It  existed  from  the  foundation  of  the  world.  But 
it  took  on  a  new  meaning  and  new  activity  when  the  things 
began  to  be  made  first  and  sold  after  (as  they  are  under  the 
manufacturing  system)  instead  of  being  sold  first  and  made 
afterward,  as  they  were  under  the  older  order.  If  you  con- 
tract to  buy  something  which  is  not  yet  in  existence  —  a 
bridge,  a  house,  a  suit  of  clothes,  or  what  not  —  the  bar- 
gain is  largely  a  matter  of  estimate,  often,  indeed,  a  matter 
of  guess  work,  on  both  sides.  You  have  to  strike  a  mental  bal- 
ance between  the  several  alternatives  presented  and  compare 
in  your  mind  net  results  of  cost,  design,  quality,  certainty  and 
promptness  of  delivery,  personality,  credit,  and  perhaps 
many  other  things,  some  of  them  intangible,  and  some  only 
to  be  proved  by  the  outcome.  The  proposition  that  seems 
most  attractive  is  closed;  the  competing  ones  are  never  car- 
ried out  at  all.  The  buyer  never  can  tell  with  absolute  cer- 
tainty whether  or  not  he  got  the  best  value  for  his  money; 
he  can  only  compare  the  thing  which  has  been  made  with  what 
he  thinks  the  other  things  would  have  been  if  they  had  been 
made.  The  seller  does  not  know  until  everything  is  over 


THE    INDUSTRIAL    SYSTEM  9 

whether  or  not  he  made  a  profit,  or  how  much.  But  when 
you  sell  things  already  made,  like  lathes  or  high-speed  en- 
gines or  dynamos,  off  the  sales-room  floor,  the  prospective 
buyer  can  make  the  most  absolute  and  intimate  comparison 
between  the  things  and  their  prices.  He  can  compare 
Brown  &  Sharpe  with  Lodge  &  Shipley,  Harrisburg  with 
the  Ball  engine,  Westinghouse  with  Crocker-Wheeler.  He 
can  compare  accurately  design,  quality,  cost  before  a  word  or 
a  dollar  passes.  The  necessity  for  offering  the  best  goods 
for  the  least  money  and  yet  making  a  fair*  profit  becomes 
vital  and  insistent,  and  so  the  knowledge  of  actual  costs  and 
the  ability  to  reduce  costs  become  fundamental.  Competi- 
tion has  therefore  been  in  one  way  a  tremendous  force  for 
economy  in  manufacturing.  And  yet,  by  a  paradox,  in  an- 
other way  competition  has  been  one  of  the  great  sources  of 
waste,  by  causing  duplication  of  plant,  of  organization,  of 
equipment,  of  sales  effort,  and  of  middle-men  —  none  of 
which  may  have  any  better  reason  for  existence  than  some- 
one's desire  to  share  in  tempting-looking  profits,  but  all  of 
which  must  be  paid  by  the  consumer  —  all  of  which  become 
a  burden  on  society  at  large1. 

The  new  and  ethically  fine  ideal,  therefore,  is  efficiency 
—  the  reduction  of  costs  and  the  elimination  of  waste  for 
the  primary  purpose  of  doing  the  thing  as  well  as  it  can 
be  done,  and  the  distribution  of  the  increased  profits  thus 
secured  among  producer,  consumer,  and  employee.  Effi- 
ciency is  a  concept  as  much  finer  than  competition  as  crea- 
tion, conservation,  is  finer  than  warfare.  It  is  a  philos- 
ophy —  an  interpretation  of  the  relations  of  things  that  may 
be  applied  not  only  to  industry  but  to  all  life.  Let  me  quote 
a  few  sentences  from  Harrington  Emerson's  "  Efficiency  as 
a  Basis  for  Operation  and  Wages  "  : 

"  If  we  could  eliminate  all  the  wastes  due  to  evil,  all  men 
would  be  good;  if  we  could  eliminate  all  the  wastes  due  to 
ignorance,  all  men  would  have  the  benefit  of  supreme  wis- 


IO  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

dom;  if  we  could  eliminate  all  the  wastes  due  to  laziness  and 
misdirected  efforts,  all  men  would  be  reasonably  and  health- 
fully industrious.  It  is  not  impossible  that  through  efficiency 
standards,  with  efficiency  rewards  and  penalties,  we  could 
in  the  course  of  a  few  generations  crowd  off  the  sphere  the 
inefficient  and  develop  the  efficient,  thus  producing  a  nation 
of  men  good,  wise  and  industrious,  thus  giving  to  God  what 
is  His,  to  Caesar  what  is  his,  and  to  the  individual  what  is 
his.  The  attainable  standard  becomes  very  high,  the  at- 
tainment itself  becomes  very  high. 

"  Efficiency  is  to  be  attained  not  by  individual  striving, 
but  solely  by  establishing,  from  all  the  accumulated  and 
available  wisdom  of  the  world,  staff-knowledge  standards 
for  each  act  —  by  carrying  staff  standards  into  effect  through 
directing  line  organization,  through  rewards  for  individual 
excellence;  persuading  the  individual  to  accept  staff  stand- 
ards, to  accept  line  direction  and  control,  and  under  this 
double  guidance  to  do  his  own  uttermost  best." 

Efficiency,  then,  and  in  consequence  industrial  engineer- 
ing, which  is  the  prosecution  of  efficiency  in  manufacturing, 
involves  much  more  than  mere  technical  considerations  or 
technical  knowledge.  If  we  consider  the  way  in  which  the 
manufacturing  system  came  into  existence,  we  can  quite 
easily  and  clearly  discover  its  most  important  elements;  we 
shall  see  particularly  something  that  it  is  of  the  utmost  im- 
portance for  us  to  understand,  and  that  is  that  it  did  not 
originate  in  technical  advances  alone,  and  it  has  never  de- 
pended upon  technical  advances  alone,  but  it  has  been  in- 
fluenced at  least  in  equal  and  perhaps  in  larger  proportion 
by  economic  or  commercial  conditions,  and  by  another  set 
of  factors  which  are  psychological  —  that  is,  which  have  to 
do  with  the  thoughts  and  purposes  and  emotions  of  men. 

The  point  is  very  important,  because  true  and  stable  in- 
dustrial progress,  whether  for  the  individual,  the  manufac- 
turing plant  or  corporation,  or  the  nation  at  large,  depends 


THE    INDUSTRIAL    SYSTEM  I  I 

upon  a  wise  co-ordination  and  balance  between  technical, 
commercial,  and  human  considerations.  It  is  frequently 
necessary  in  addressing  a  commercial  audience  to  empha- 
size the  importance  of  the  technical  element.  Before  a 
technical  audience,  on  the  other  hand,  emphasis  must  often 
be  laid  on  the  commercial  and  psychological  factors  that  in 
practical  achievement  must  always  be  interwoven  with  the 
technical  factor.  Every  great  industrial  organization  and 
every  great  step  in  industrial  progress  to-day  includes  all 
three  elements,  but  they  will  perhaps  appear  more  distinct 
if  we  look  at  the  origin  and  source  of  the  manufacturing  sys- 
tem, out  of  which  this  new  science  of  industry  has  sprung. 
The  origin  of  the  manufacturing  system  was  clearly  enough 
the  introduction  of  a  group  of  inventions  that  came  in  close 
sequence  about  the  end  of  the  eighteenth  century  and  be- 
ginning of  the  nineteenth.  These  were  the  steam  engine, 
mechanical  spinning  and  weaving  machinery,  the  steamboat, 
the  locomotive,  and  the  machine-tool.  It  is  commonly  as- 
sumed that  the  great  cause  of  the  entire  movement  was 
Watt's  improvement  of  the  steam  engine  —  that  the  indus- 
trial era  which  began  a  little  more  than  a  century  ago  was, 
so  to  speak,  waiting  in  suspense,  in  the  hush  of  things  un- 
born, ready  to  leap  into  being  as  soon  as  the  prime  mover 
had  been  perfected  to  a  point  of  practical  service. 

This  view  seems  to  be  incomplete.  The  steam  engine 
had  been  discovered,  forgotten,  and  rediscovered,  it  would 
be  difficult  to  say  how  often,  from  the  time  of  Hero  or 
earlier  down  to  the  time  of  Watt  —  forgotten  and  ignored 
because  the  world  had  no  use  for  it ;  the  economic  conditions 
were  not  ripe  for  it.  If  there  had  been  the  same  demand 
for  power  to  pump  the  mines  in  England,  the  same  demand 
for  machinery  in  the  textile  industries  of  England,  the  same 
need  for  better  vehicles  to  transport  commercial  products  by 
land  and  by  sea,  in  the  time  of  Papin  or  the  Marquis  of 
Worcester  that  there  was  in  the  time  of  Watt,  I  think  it  is 


12  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

quite  conceivable  that  the  inventions  which  made  Watt  fa- 
mous would  have  come  a  full  century  earlier,  and  his  genius 
would  have  been  exerted  upon  a  later  stage  of  the  problem, 
as  the  genius  of  Willans  and  Corliss  and  Parsons  and  Curtis 
has  been  within  the  period  of  our  own  lives. 

I  am  strongly  inclined  to  believe  that  the  world  has  al- 
ways had  something  near  the  quality  and  quantity  of  en- 
gineering talent  it  has  been  able  to  use.  When  civilization 
was  dependent  chiefly  upon  roads,  aqueducts,  bridges  and 
buildings,  it  got  them.  We  have  never  done  some  of  these 
things  better,  technically  speaking,  than  the  Assyrians,  or 
the  Romans,  or  the  architects  of  the  great  cathedrals  of  the 
middle  ages;  some,  indeed,  we  perhaps  never  shall  do  again 
as  well.  Newcomen,  Watt,  Arkwright,  Stephenson,  Besse- 
mer, applied  genius  to  a  new  sort  of  opportunity,  rather  than 
embodied  in  themselves  a  new  order  of  genius.  They  may 
indeed  have  been  greater  than  other  workers  who  preceded 
them,  but  the  more  important  element  in  their  success  is  that 
the  world  was  at  last  ready  and  waiting  as  it  never  had  been 
before  for  the  peculiar  product  of  genius  they  had  to  offer. 
This  readiness  that  opened  the  door  to  their  success  was  due 
to  economic  or  commercial  conditions,  not  merely  to  the 
technical  invention.  In  its  larger  relations,  then,  technical 
success  depends  upon  commercial  opportunity.  There  must 
be  a  potential  market.  Bessemer  steel  could  not  have  found 
any  welcome  in  the  Stone  Age.  The  typewriter  would  not 
have  succeeded  in  the  dark  ages  when  no  one  but  a  few 
clerics  could  read  and  write.  Savages  who  traded  cocoa- 
nuts  for  beads  and  brass  wire  could  afford  no  encouragement 
to  the  manufacturer  of  the  cash  register  or  the  adding  ma- 
chine. It  was  not  because  of  thermodynamic  inefficiency 
that  Hero's  engine  failed  of  adoption.  On  the  other  hand, 
when  the  world  was  ready  for  steam  power  it  accepted  very 
gladly  to  begin  with  a  very  crude  machine,  and  technical  im- 


THE   INDUSTRIAL   SYSTEM  13 

provement  went  step  by  step  with  larger  practical  utilization, 
sometimes  leading  and  sometimes  following.  There  must, 
then,  be  a  potential  market  or  application,  or  advance  in  the 
applied  sciences  will  be  limited.  This  is  an  axiom  to  be 
placed  alongside  of  another  —  that  there  must  be  scientific 
study  and  research,  or  industries  based  upon  the  applica- 
tions of  science  will  stagnate  and  remain  at  a  low  stage  of 
efficiency. 

The  second  factor  in  industrial  progress,  then,  is  the  com- 
mercial factor.  There  must  be  a  potential  market;  but  it 
does  not  follow  from  this  that  technical  progress  is  wholly 
subordinate  to  economic  conditions.  The  inventor  or  the 
engineer  is  not  of  necessity  merely  a  follower  of  progress  in 
commerce  or  industry.  Many  of  the  great  advances  in  ap- 
plied science,  or  in  branches  of  industrial  achievement  per- 
haps too  lowly  to  be  called  applied  science,  have  been  made 
by  man  who  foresaw  not  only  technical  possibilities  but 
commercial  possibilities  —  who  undertook  not  only  to  per- 
fect the  invention  but  to  show  the  world  the  advantage  of 
using  it.  I  think  this  was  substantially  the  case  with  wire- 
less telegraphy,  with  the  cash  register  and  typewriter.  No- 
body had  demanded  these  things  because  nobody  had  thought 
of  them,  and  the  productive  act  in  each  instance  included 
not  only  technical  insight  into  the  possibilities  of  doing  the 
thing,  but  human  insight  into  the  fact  that  people  would  ap-" 
preciate  these  things  and  use  them  if  they  could  be  furnished 
at  or  below  a  certain  cost.  Modern  industrial  methods  have 
shown  us  that  in  many  cases  there  is  no  such  thing  as  a  fixed 
demand  beyond  which  supply  can  not  be  absorbed,  but  that 
demand  is  a  function  of  cost  of  production.  There  may  be 
no  demand  at  all  for  an  article  costing  a  dollar,  but  an  al- 
most unlimited  demand  for  the  same  article  if  it  can  be  sold 
at  five  cents.  A  large  part  of  the  work  of  the  production 
engineer  lies  in  the  creation  of  methods  by  which  the  cost  of 


14  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

production  is  decreased  and  the  volume  of  production  is 
thereby  increased,  with  advantages  to  both  the  producer  and 
the  consumer. 

In  all  these  cases  you  see  that  technical  achievement,  tech- 
nical success,  is  closely  interlocked  with  industrial  or  eco- 
nomic conditions,  and  with  the  understanding  and  control  of 
industrial  or  economic  influences  and  forces. 

The  third  factor  in  industrial  progress  is  the  psychological 
factor  —  the  element  contributed  by  the  mental  attitude, 
emotions,  or  passions  of  men.  I  might  suggest  its  possible 
importance  by  reminding  you  that  there  were  centuries  in 
which  the  inventor  of  the  steam  engine,  far  from  being  re- 
warded, would  have  been  burned  at  the  stake  as  a  magi- 
cian. This  would  not  have  been  because  the  extraordinary 
character  of  the  achievement  was  unrecognized,  but  because 
its  nature  was  misinterpreted.  That  particular  form  of  ex- 
pressing intellectual  dissent  has  gone  out  of  date.  We  are 
much  more  civilized  now,  and  nineteenth-  or  twentieth-cen- 
tury inventors  who  are  far  ahead  of  their  times  are  no  longer 
burned;  they  are  merely  allowed  to  starve  to  death;  while 
those  who  are  timely,  but  not  commercially  shrewd,  are  us- 
ually swindled  by  some  promoter,  who  in  turn  is  frozen  out 
by  a  trust.  In  any  case,  you  see,  the  simple  technician  gets 
the  worst  of  it  industrially,  not  because  his  physical  science 
is  weak,  but  because  his  commercial  and  mental  shrewdness 
is  not  correspondingly  developed. 

Taking  a  larger  view  of  it,  we  shall  see  that  almost  every 
important  advance  in  engineering  progress  is  made  only  after 
a  period  of  pause,  an  interval  following  proof  of  the  tech- 
nical achievement,  following  even  demonstration  of  its  com- 
mercial economy.  We  might  call  this  the  psychological  lag 
—  the  time  necessary  for  the  growth  of  human  faith  suf- 
ficient to  energize  an  industrial  movement.  In  the  case  of 
the  electric  railway,  or  the  motor  vehicle,  for  example,  this 
lag  was  measured  by  years.  Bessemer  could  not  convince 


THE    INDUSTRIAL    SYSTEM  15 

the  ironmasters  of  England,  and  had  to  build  his  own  plant. 
Westinghouse,  having  gained  after  much  difficulty  an  audi- 
ence with  the  greatest  railroad  manager  of  that  day,  was 
told  that  this  practical  railroad  man  had  no  time  to  waste 
on  a  damn  fool  who  expected  to  stop  railroad  trains  with 
wind.  The  matter  deserves  emphasis  because  it  is  almost 
certain  to  enter  into  the  individual  experience  of  every  man. 
You  will  have  to  make  someone  believe  you,  and  believe  in 
you,  before  you  can  get  anywhere  or  do  anything.  When  a 
technical  man  has  a  proposition  to  put  before  an  individual, 
or  a  group  of  individuals,  or  society  at  large,  he  is  very 
likely  to  think  that  scientific  demonstration  of  its  technical 
soundness  ought  to  be  convincing.  You  will  find,  however, 
that  men  at  large  will  substantially  ignore  scientific  proof, 
and  that  you  must  add  to  it,  second,  proof  of  the  commer- 
cial or  economic  argument,  and  third,  that  psychological 
force  which  convinces  not  the  reason,  but  the  emotions.  In 
all  industrial  engineering,  which  involves  dealing  with  men, 
this  psychological  or  human  element  is  of  immense,  even 
controlling  importance.  The  principles  of  the  science  are 
absolute,  scientific,  eternal.  But  methods,  when  we  are 
dealing  with  men,  must  recognize  the  personal  equation 
(which  is  psychologic)  or  failure  will  follow.  The  differ- 
ences between  the  several  philosophies  of  works  management 
as  expressed  in  the  wage  systems  which  we  are  going  to  con- 
sider later  are  psychological.  Success  in  handling  men  and 
women,  which  is  one  of  the  most  important  parts  of  the 
work  of  the  industrial  engineer,  is  founded  on  knowledge 
of  human  nature,  which  is  psychology. 

The  great  industrial  movement,  then,  with  which  we  have 
to  do  is  triune  in  its  nature,  the  three  chief  elements  being 
the  technical  or  scientific,  the  economic  or  commercial,  and 
the  psychological  or  human.  They  seldom  respond  at  equal 
rates  to  the  impetus  of  advance.  Sometimes  the  technician 
pushes  so  far  ahead  that  the  world  loses  touch  with  what  he 


1 6  PRINCIPLES    OF   INDUSTRIAL   ENGINEERING 

is  doing  and  his  work  lies  long  unused  until  civilization 
catches  up;  sometimes  the  commercial  tendency  is  unduly 
aggressive,  and  discourages  or  impedes  real  scientific  achieve- 
ment; very  often  the  men  most  concerned  with  the  indus- 
trial activities  go  badly  wrong  in  their  philosophy,  and  get 
disastrously  false  notions  as  to  what  makes  for  real  progress 
and  real  welfare.  More  difficulties,  perhaps,  come  from  this 
cause  than  from  any  other. 

To  the  technical  man,  it  is  an  ever-present  duty  to  keep  in 
view  absolute  ideals,  to  seek  every  chance  for  their  advance- 
ment, and  to  mould  conditions  and  men  so  as  to  obtain  con- 
stantly nearer  approach  to  these  ideals;  but  in  doing  this  he 
must  never  forget  to  attach  full  weight  to  economic  condi- 
tions, and  he  must  never  allow  himself  to  ignore  human  na- 
ture. 


REFLEX  INFLUENCES  OF  THE  INDUSTRIAL 

SYSTEM 


CHAPTER  II 

REFLEX  INFLUENCES  OF  THE  INDUSTRIAL  SYSTEM 

IN  the  foregoing  broad  sketch  of  the  rise  of  the  industrial 
system  and  of  the  influences  controlling  its  development, 
much  stress  is  laid  on  the  non-mechanical  factors,  because 
when  we  consider  manufacturing  as  a  province  of  engineer- 
ing we  are  prone  to  think  first,  oftenest,  and  most  of  the 
technical  aspects.  They  need  no  added  emphasis.  It  is  ex- 
pedient rather  to  keep  deliberately  in  view  the  other  com- 
ponents of  the  new  applied  science  of  industrial  manage- 
ment. But  having  made  emphatic  recognition  and  ac- 
knowledgment of  the  economic  and  psychologic  factors  in 
the  movement,  we  may  return  to  pay  just  tribute  to  the  power 
and  effect  of  the  great  discoveries  and  inventions  that  in- 
augurated the  manufacturing  system.  The  distinguishing 
characteristic  of  this  system  was  the  introduction  of  me- 
chanical power  and  machinery  in  place  of  hand  labor.  In- 
crease in  complexity  of  industrial  organization  was  thereby 
very  much  accelerated,  and  great  changes  were  worked  from 
which  have  followed  many  of  the  difficulties  and  also  many 
of  the  advantages  of  manufacturing  conditions  to-day.  For 
this  replacement  of  the  old  handicrafts  by  power  and  ma- 
chinery gave  impulse  to  three  great  swiftly  moving  tenden- 
cies: aggregation,  or  progressive  increase  in  size  of  the 
industrial  unit;  standardization,  or  the  execution  of  work  by 
fixed  patterns ;  and  specialization,  or  limitation  of  the  work 
of  each  individual  to  the  repetition  of  some  small  element  of 
an  entire  process.  Each  of  them  has  far-reaching  effects,  not 
only  in  the  conduct  of  industry,  but  upon  the  social  and  po- 
litical order.  Let  us  consider  them  separately. 

19 


2O  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

Aggregation  is  the  coalescence  of  capital,  of  machinery,  of 
operatives,  into  larger  and  larger  bodies  under  one  central- 
ized direction.  Large  bodies  of  workers  had  indeed  been 
assembled  in  the  past  for  works  of  construction  —  witness 
the  Pyramids  —  but  the  occasion  was  unusual.  Handi- 
crafts induced  distribution  rather  than  concentration.  But 
when  invention  had  given  the  world  power-driven  machines, 
it  became  frequent,  then  customary,  then  inevitable  (because 
economical)  to  group  them  according  to  the  largest  number 
that  could  be  conveniently  operated  by  some  source  of  prime 
energy  —  the  older  water-power  or  the  newer  steam-engine. 
In  either  case  the  result  was  the  assembly  in  one  establish- 
ment of  a  body  of  workers,  larger  or  smaller,  according  to 
the  mechanical  and  market  conditions.  In  fact,  the  power- 
plant  became  the  principal  material  factor  determining  the 
size  of  the  industrial  unit. 

Before  the  mechanical  prime-mover  and  the  power-driven 
machines  were  put  into  service,  in  the  days  when  the  hand 
or  the  foot  of  the  workman  furnished  all  the  motive  power 
necessary,  the  industrial  unit  was  the  single  workman.  He 
was  motive  power,  transmission  gearing,  and  often  driven 
machine,  all  in  himself,  and  he  needed  no  factory  building 
other  than  the  house  in  which  he  lived.  This  was  the  age  of 
domestic  industries.  It  exists  to-day  to  some  extent,  side  by 
side  with  the  large  manufacturing  plant  and  in  the  midst  of 
this  factory  era.  Familiar  examples  are  the  Scotch  weavers, 
the  German  toy  makers,  Swiss  watch  makers,  and  in  many 
large  cities  a  certain  proportion  of  the  garment  workers. 

It  would  seem  as  if  these  domestic  industries  should  af- 
ford the  most  nearly  ideal  conditions  for  the  welfare  of 
the  worker,  and  should  offer  least  opportunity  for  the  evils 
of  the  manufacturing  system.  But  this  supposition  does 
not  seem  always  to  be  well  supported  by  examination  of  the 
facts.  You  may  remember  that  Barrie  does  not  draw  a 
very  happy  picture  of  the  condition  of  the  Scotch  weavers, 


SPECIALIZATION    AND    STANDARDIZATION  21 

and  we  do  not  have  to  go  far  to  find  that  the  lot  of  the 
garment  worker  who  carries  on  his  work  in  his  own  home 
is  in  many  respects  miserable.  The  concentration  of 
workers  into  factories,  it  is  true,  caused  many  evils;  but  the 
very  fact  that  the  communities  of  workers  were  so  large  and 
the  conditions  were  so  difficult  to  conceal,  of  itself  operated 
powerfully  to  bring  about  a  correction  of  the  evils.  How- 
ever, taking  the  whole  range  of  industrial  operations,  and 
the  occupations  dependent  upon  them,  one  of  the  first  and 
greatest  of  the  changes  occasioned  by  the  new  order  was 
this  change  of  concentration  or  aggregation.  It  caused  a 
concentration  of  manufacturing  enterprise  in  regions  where 
fuel  was  abundant  and  good.  It  caused  aggregation  of 
capital  to  finance  the  larger  and  more  extensive  plants  which 
became  necessary  when  costly  engines  and  machinery  be- 
came part  of  the  requisite  equipment.  It  caused  aggrega- 
tion of  workers  in  the  buildings  where  work  must  be  carried 
on,  and  in  the  districts  available  for  residence  in  the  vicinity 
of  these  works.  The  same  principle  extended  its  influence 
into  the  field  of  transportation,  which  became  focalized  at 
the  great  manufacturing  centers  and  developed  along  cer- 
tain lies  connecting  these. 

This  tendency  to  aggregation,  be  it  noted,  exists  naturally 
as  the  outcome  of  merely  mechanical  or  physical  conditions, 
and  even  in  this  direction  the  things  that  set  it  in  operation 
continued  to  act  in  such  a  way  as  to  cause  permanence  and 
acceleration  of  the  movement.  Broadly  speaking,  the  big 
factory  has  some  advantage  over  the  little  one.  Its  wants 
are  larger,  its  purchases  greater,  and  hence  its  custom  is 
worth  more  to  sellers  of  materials  and  it  is  likely  to  get  its 
supplies  a  little  cheaper.  Its  fixed  expenses  for  manage- 
ment, superintendence,  and  administration  generally,  are 
perhaps  no  greater  absolutely  than  those  of  the  small  factory, 
and  almost  certainly  are  less  per  unit  of  product.  Its  in- 
fluence, prestige,  and  control  of  trade  connections  are  likely 


22  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

to  be  greater.  It  can  frequently  afford  to  hire  better  talent. 
It  may  be  in  position  to  use  waste  or  by-products  advanta- 
geously,, which,  in  smaller  quantities,  can  not  be  recovered 
except  at  expense  greater  than  the  saving.  It  is  often  in 
position,  if  wisely  administered,  to  undersell  its  small  com- 
petitor, and  still  deliver  an  equal  or  a  better  product. 

This  is  not  universally  and  unlimitedly  true.  There  may 
be,  and  there  often  are,  critical  points  at  which  the  large 
manufacturer  is  at  a  disadvantage  compared  to  the  small 
one.  But  the  tendency  is  for  the  big  to  grow  bigger,  and 
the  strong  to  grow  stronger,  at  some  expense  to  the  small 
and  weak.  This  is  true  of  the  pickerel  in  the  pond  and  of 
the  tree  in  the  woods.  Given  even  equal  brains  in  the 
management,  it  is  true  of  the  industrial  corporation;  and 
of  course  it  is  often,  if  not  usually,  true  that  the  big  con- 
cern attracts  or  can  attract  to  its  service  the  best  brains  in 
the  market.  I  am  still  speaking  of  what  we  might  term 
wholly  physical  tendencies.  But  here  again  the  physical 
tendency  becomes  closely  intertwined  with  another  tendency, 
which  is  at  last  partly  psychological  —  the  tendency  to  as- 
sociation. Whenever  two  or  three  are  gathered  together  in 
one  place,  with  a  common  thought  or  sympathy,  somebody 
with  the  spirit  of  the  organizer  always  turns  up  and  starts 
a  society,  or  a  brotherhood,  or  a  lodge,  or  an  order  of  sons 
or  daughters  of  something,  and  soon  we  have  nobles  and 
princes,  exalted  and  most  worshipful  grand  masters,  secrets, 
grips,  passwords,  and  a  constitution,  by-laws  and  ritual. 
We  find  this  everywhere,  even  when  the  common  bond  has 
to  be  artificially  created.  It  was  absolutely  inevitable 
where  great  interests,  vital  to  the  well-being  of  the  parties 
in  question,  were  at  stake.  Here  we  had  a  vast  industrial 
civilization  growing  up  —  legislative  bodies,  transportation 
companies,  manufacturers  and  employees,  all  taking  some- 
what diverse  views  as  to  what  was  right  and  proper,  and 
all  striving  more  or  less  selfishly  to  gain  as  much  and  to 


SPECIALIZATION    AND    STANDARDIZATION  23 

yield  as  little  as  possible.  It  was  absolutely  inevitable  that 
the  units  in  each  and  every  one  of  these  parties  should  draw 
together,  not  only  through  the  absorption  of  the  lesser  by 
the  greater,  but  in  a  co-operative  effort  to  secure,  by  col- 
lective bargaining,  for  themselves  and  their  own  interests, 
the  greatest  advantage  possible.  So,  as  a  logical  outcome, 
we  have  not  only  railway  consolidation,  but  trunk-line 
pools,  presidents'  agreements,  and  traffic  associations  among 
the  railways.  On  the  part  of  employers,  we  have  manu- 
facturers' associations,  syndicates,  cartels  and  trusts.  On 
the  part  of  workmen  we  have  trade  unions,  labor  organi- 
zations and  federations.  In  general,  these  things  are  in- 
evitable, and  they  will  persist.  They  are  part  of  ttye 
evolution  of  the  time,  and  they  can  not  be  abolished  by 
legislation  nor  crushed  by  opposing  organizations.  I  do 
not  mean  for  a  moment  that  they  have  been  or  are  yet 
wholly  beneficent  —  far  from  it.  Trusts,  when  they  be- 
came great  enough,  have  proved  ruthless  in  crushing  com- 
petitors, and  soulless  in  wringing  profits  from  helpless 
customers.  Labor  unions  have  committed  crimes  of  violence 
that  shock  humanity.  Railroads  have  cared  for  neither 
law  nor  gospel  in  their  autocratic  pursuit  of  their  own  way. 
But  these  are  not  the  healthy,  but  the  unhealthy,  phe- 
nomena of  growth  and  change  —  the  abuses  which  seem  to 
be  always  incident  to  a  changing  era.  They  pass  and  dis- 
appear with  progress  in  the  general  mastery  of  understand- 
ing as  to  what  is  best  for  society  at  large  under  the  new 
conditions.  They  are  abated,  not  by  arresting  the  whole 
development,  and  perhaps  not  as  much  as  is  generally 
thought  by  legislative  enactment,  but  rather  by  a  general 
change  in  the  temper  of  the  world,  which  makes  the  evil 
proceedings  unthinkable  and  the  position  of  the  evil-doer 
intolerable.  The  world  has  seen  again  and  again  these  out- 
breaks of  destructive  activity  on  the  part  of  unscrupulous 
men,  who  are  partly  quicker  than  others  to  see  selfish  op- 


24  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

portunities  in  a  new  condition  of  affairs,  and  partly  nearer 
to  the  beasts  of  prey  in  their  lack  of  conscience  in  seizing 
whatever  their  skill  enables  them  to  grasp  and  their  strength 
enables  them  to  hold. 

In  the  days  when  the  greatest  prowess  the  world  knew 
was  military,  it  was  the  "  man  on  horseback  "  who  waded 
through  blood  to  power  and  fortune;  but  it  would  be  in- 
conceivable that  we  should  have  another  Napoleon  to-day. 
The  rise  of  commerce  and  traffic  over-seas,  with  or  without 
the  opportunity  afforded  by  almost  continual  wars  and 
that  very  elastic  institution  known  as  "  letters  of  marque," 
saw  the  development  of  piracy  to  the  rank  almost  of  a  gentle- 
man's occupation ;  but  piracy  has  disappeared  from  the  earth, 
or  rather  from  the  ocean.  The  first  great  era  of  railroad 
building  in  this  country  brought  with  it  our  now  notorious 
generation  of  millionaire  railroad  wreckers;  but  I  think  we 
all  must  admit  that  the  railroad  world  has  purged  itself 
pretty  thoroughly  of  that  disease,  or  at  least  that  our  great 
lines  now  are  generally  administered  with  honesty  and  faith- 
ful regard  for  the  interests  of  the  security  holders. 

It  is  not  to  be  denied  that  the  hanging  of  pirates  and 
the  jailing  of  dishonest  railroad  presidents  has  its  effect  in 
stimulating  a  change  of  sentiment;  but  the  great  cause,  after 
all,  is  the  altered  public  opinion  which  makes  the  hanging 
or  the  jailing  possible.  To  borrow  a  simile  from  bacter- 
iology, these  poisons  that  germinate  in  the  body  politic, 
and  seem  sometimes  to  be  increasing  to  fatal  proportions, 
appear  also  to  develop  their  own  anti-toxins  by  which  they 
are  finally  checked  and  destroyed.  The  world  no  longer 
lives  in  fear  of  an  Alexander  or  a  Napoleon,  but  its  confi- 
dence is  not  based  upon  abolition  of  the  military  system 
which  gained  Napoleon  his  opportunity.  We  still  have 
standing  armies  far  more  powerful  than  those  with  which 
Napoleon  conducted  his  campaigns,  but  in  general  they  in- 
spire in  the  minds  of  the  Nation  feelings  of  comfort,  security, 


SPECIALIZATION    AND    STANDARDIZATION  25 

and  protection.  I  have  a  good  deal  of  faith  that  the  great 
captains  of  industry  will  soon  learn  a  lesson  from  the  past 
and  the  present  which  will  make  them  as  little  a  menace 
to  the  country's  good  as  the  captains  of  war  now  are.  I 
think  we  shall  eventually  see  that  it  is  not  a  control  of  25 
per  cent  or  50  per  cent  of  the  output  that  makes  a  trust 
good  or  bad,  but  only  its  fairness  towards  consumer  and 
employee,  and  the  health  and  soundness  of  its  economic 
policy.  I  think  we  shall  find  that  trust  managers  will  in- 
creasingly appreciate  (as  some  of  them  do  already)  that 
their  own  best  interests  are  served  when  they  share  to  the 
largest  consistent  extent,  with  customers  and  employees,  and 
through  them  with  the  public,  those  advantages  in  manu- 
facturing which  vast  organized  facilities  give;  and  I  think 
labor  will  realize  (as  some  of  its  advanced  leaders  already 
do)  that  its  own  cause  will  be  best  furthered  when  it  aids 
all  sound  measures  and  plans  for  increasing  the  efficiency  of 
the  workman,  and  when  it  seeks  to  exact,  not  as  much  as 
force  can  extort,  right  or  wrong,  but  just  what  is  reasonable 
and  equitable. 

This  may  sound  like  a  description  of  the  millennium ;  but 
the  curve  of  progress  made  in  the  last  few  decades  tends 
clearly  in  the  direction  I  have  tried  to  describe.  There  is 
indeed  yet  a  long  way  to  go.  But  reason  and  common- 
sense  are  growing  more  powerful  year  by  year,  and  the  more 
enlightened  common-sense  becomes,  the  more  it  will  see  that 
we  must  let  those  with  whom  we  deal  prosper,  if  we  are  to 
prosper  ourselves. 

At  all  events,  the  great  corporations  and  the  great  labor 
unions  are  here,  largely  as  the  result  of  the  great  manu- 
facturing plant.  I  do  not  pretend  to  speak  ex  cathedra, 
but  it  seems  to  be  as  futile  for  a  manufacturer  or  an  as- 
sociation of  manufacturers  to  attempt  to  "  smash  the  union," 
as  it  is  for  a  politician  or  a  legislature  to  propose  to  "  bust 
the  trusts."  They  appear  to  be  permanent  institutions  — 


26  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

or  at  least  as  permanent  as  most  of  our  other  economic  in- 
stitutions —  and  while  of  course  their  excesses  must  be 
curbed  and  many  of  their  purposes  must  be  enlightened, 
they  are  a  necessary  part  of  the  age,  and  we  must  deal  with 
them  as  wisely  and  as  thoughtfully  as  we  can,  but  with 
conviction  that  they  are  here  to  stay,  and  that  whether  we 
like  it  or  not,  they  must  be  dealt  with.  Aggregation  is  a 
functional  necessity,  indeed  an  organic  part,  of  the  industrial 
and  manufacturing  system. 

Specialization,  the  second  great  tendency,  is  the  separation 
of  work  into  elementary  or  fractional  parts  which  are  dis- 
tributed to  different  operatives.  The  workman  no  longer 
produces,  or  even  reproduces,  a  complete  article,  but  only 
performs  over  and  over  some  one  of  the  series  of  operations 
necessary  to  the  production  of  that  article.  This  is  the 
natural  outgrowth  of  the  replacement  of  the  journeyman 
or  mechanic  by  the  machine  tender.  Take  the  case  of  the 
weaving  industry  as  an  illustration.  In  its  primitive  form, 
the  one  workman  or  workwoman  proceeded  first  to  card 
wool  or  flax  or  cotton,  until  there  was  enough  to  spin  the 
yarn;  then  he  spun  yarn  until  he  had  enough  to  make  the 
rug  or  bolt  of  cloth  or  what  not  he  had  in  view;  then  he 
threaded  the  warp  through  the  harness  of  his  loom,  and 
worked  at  the  weaving  until  the  job  was  finished.  Probably 
he  was  dyer  and  finisher,  also,  when  necessary.  You  can 
see  this  whole  process  carried  on  to-day  in  the  log  cabins 
of  North  Carolina,  the  farm-houses  of  Nova  Scotia,  or 
the  hogans  of  the  Navajo  reservation. 

But  as  soon  as  the  industry  is  taken  away  from  hand 
workers  and  given  to  machines,  the  operations  of  carding, 
spinning  and  weaving  are  split  up  between  at  least  three 
and  probably  more  than  three  different  pieces  of  apparatus, 
which  means  three  or  more  different  sets  of  operators,  each 
familiar  with  but  one  special  stage  of  the  process  of  cloth 
making.  There  are  at  least  three  persons  doing  in  the 


SPECIALIZATION    AND    STANDARDIZATION  ^f] 

aggregate  what  one  did  originally,  each  seeing  but  one- 
third  of  the  process  completed  under  his  hands.  But  the 
total  output  will  probably  be  much  more  than  three  times  as 
large,  even  though  the  power  loom  weaves  no  faster  than 
the  hand  loom  or  the  spinning  frame  spins  no  faster  than 
the  hand  wheel.  This  is  because  the  time  of  changing 
from  one  sort  of  work  to  another  is  saved,  and  each  operator 
becomes  much  more  rapid  and  efficient  by  the  constant  con- 
tact with  and  repetition  of  his  limited  function.  When- 
ever enough  work  is  assembled  in  one  establishment  to  allow 
this  sort  of  segregation  of  functions,  an  economic  gain  is 
experienced.  Thus,  in  a  manufacturing  machine-shop,  in- 
stead of  allowing  the  operative  to  perform  one  operation 
after  another  until  he  has  finished  a  given  article,  we 
keep  him,  say  upon  one  machine  tool  only  —  lathe,  planer, 
drill  press  or  whatever  it  may  be  —  with  the  double  object 
of  saving,  first,  the  time  of  changing  from  one  part  of  the 
floor  to  another,  and,  second,  of  cultivating  a  higher  degree 
of  facility  within  the  limited  range.  Next,  we  may  go 
a  step  further,  and  instead  of  allowing  our  machinist  to  do 
all  the  miscellaneous  work  on  a  boring  mill,  for  example, 
we  keep  him  busy  on  boring  nothing  but  one  size  of  cylinder. 
We  may  even  go  further  yet,  and  confine  him  to  rough  boring, 
moving  the  pieces  afterwards  to  another  specialist,  who 
takes  the  finishing  cut.  If  our  production  of  standard  sizes 
is  large  enough,  we  may  keep  him  continuously  at  work  rough 
boring  only  one  size  of  cylinder.  In  certain  lines  of  manu- 
facture, for  which  America  has  become  famous,  this  speciali- 
zation has  been  pushed  to  remarkable  extremes*  In  the 
making  of  shoes,  for  example,  some .  operatives  may  spend 
a  life  time  doing  nothing  but  sewing  a  single  seam  in  the 
uppers. 

Standardization  is  the  third  great  tendency  in  manufac- 
turing, resulting  from  aggregation  and  going  hand  in  hand 
with  specialization.  It  is  the  reduction  of  work  to  fixed 


28  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

patterns,  which  are  more  and  more  compiled  by  the  oper- 
ations of  the  machine,  so  that  skill  of  creation  is  more  and 
more  centred  in  a  small  force  of  designers  and  the  ordinary 
workman  becomes  more  and  more  a  mere  reproducer.  It 
naturally  follows  specialization.  If  you  give  a  man  a  single 
job  or  one  stage  of  a  job  to  do  over  and  over,  the  logical 
and  necessary  thing  is  to  give  him  at  the  same  time  a 
pattern  or  standard  to  which  every  repetition  of  his  job 
shall  exactly  correspond.  Take  the  case  of  making  shoes. 
The  old-fashioned  journeyman  shoemaker  takes  the  lines  of 
his  customer's  foot,  builds  up  a  last  with  patches  here,  and 
slices  off  parings  there,  models  and  measures  and  cuts  and 
fits,  and  never  makes  two  pairs  of  shoes  exactly  alike.  The 
machine-made-shoe  factory  classifies  all  human  feet  into 
some  dozen  or  two  of  stock  sizes,  reduces  these  to  fixed 
patterns  by  which  the  leather  is  cut,  sub-divides  the  sewing 
and  other  operations  among  an  army  of  operators,  each 
of  whom  does  but  one  thing,  few  of  whom  ever  see  the 
finished  shoe,  and  none  of  whom  sees  the  foot  that  is  to 
wear  it;  and  among  the  standard  sizes  turned  out  (every 
pair  of  each  size  exactly  like  every  other  pair  of  that  size) 
somewhere  between  i  A  and  13  EE,  each  member  of  the 
human  race  is  supposed  to  find  a  shoe  he  or  she  can  wear. 
Standardization  is  reduction  to  type,  and  this  reduction 
to  type  —  this  making  everything  of  any  given  kind  exactly 
like  every  other  thing  of  that  same  kind  —  may  be  pushed 
to  any  degree  of  completeness.  It  may  go  so  far  that  it 
comprehends  the  entire  machine,  as,  for  example,  the  loco- 
motive, the  dynamo,  the  typewriter,  or  the  watch.  Every 
part  of  any  one  of  these  machines  may  be  made  so  exactly 
like  the  corresponding  part  of  every  other  machine  of  the 
same  kind,  that  perfect  interchangeability  is  secured.  This 
standard  for  the  regular  product  has  been  set  and  substan- 
tially attained  by  many  American  manufacturers,  notably 
in  the  lighter  and  finer  mechanical  lines  such  as  the  manu- 


SPECIALIZATION    AND    STANDARDIZATION  29 

facture  of  firearms,  sewing  machines,  cash  registers,  and 
watches.  The  parts  going  to  make  up  any  one  of  these 
mechanisms  are  made  separately  by  different  workmen,  none 
of  whom  may  see  the  complete  device,  or  have  any  chance 
to  fit  the  piece  he  is  making  to  the  other  pieces  with  which 
it  is  to  work.  The  part  is  turned  out  to  standard  pattern, 
perhaps  on  automatic  and  semi-automatic  machines,  con- 
trolled in  its  every  dimension  by  limit  gauges,  and  is  made 
repetitively  in  dozens,  hundreds,  or  thousands;  yet  when  as- 
sembled with  the  scores  or  hundreds  of  other  parts  which 
go  to  make  up  the  complete  anatomy  of  the  finished  ma- 
chine, it  slides  into  its  place  and  performs  its  appointed 
duty  probably  without  needing  even  the  touch  of  a  file  in 
the  hands  of  the  fitter. 

In  other  cases  where  such  absolute  identity  of  reproduc- 
tion is  not  possible,  standardization  may  go  part  way. 
Perhaps  one  standard  bed-plate  may  serve  for  several  sizes 
of  machines  or  engines.  Sizes  of  shafting,  or  dimensions  and 
tapers  of  bolts  and  other  details  or  accessories,  may  often 
and  advantageously  be  simplified  by  the  adoption  of  one 
or  a  few  standard  types.  Again,  standardization  may  be 
applied  to  the  operations  by  which  a  certain  piece  of  work 
is  performed,  or  the  time  in  which  it  is  to  be  done,  the  work- 
man being  provided  with  a  schedule  of  instructions  and  be- 
ing expected  to  follow  them  implicitly.  The  idea  every- 
where is  to  concentrate  the  thought  and  skill  upon  the 
production  of  the  best  possible  type,  and  then  to  make  the 
reduplication  of  that  type  a  purely  mechanical  process. 
The  production  of  the  original  type,  whether  this  original 
is  a  machine  or  a  method  of  working,  involves  very  expen- 
sive study  and  the  employment  of  very  expensive  talent. 
But  the  process  of  reduplication  can  generally  be  performed 
by  very  cheap  labor;  and  this  labor,  through  the  constant 
repetition  of  a  limited  number  of  movements,  often  attains 
an  almost  incredible  degree  of  rapidity.  Under  the  old 


30  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

methods  of  hand  manufacture,  every  unit  of  product  was 
practically  an  original.  It  was  built  up  piece  by  piece,  al- 
most wholly  on  the  principle  of  "  cut  and  fit  and  try  again," 
and  every  good  workman  had  to  be  a  skilled  artisan,  to  a 
greater  or  less  extent  a  designer,  often  an  artist,  and  an 
engineer.  Under  the  modern  method,  the  unusual  and 
extraordinary  skill  of  a  small  body  of  designers  is  made 
permanently  effective  in  the  tools  and  process,  and  the  work 
of  the  journeyman  is  little  more  than  mere  muscular  effort. 
Of  course,  this  movement  has  characterized  manufacturing 
everywhere  to  a  greater  or  less  extent;  but  in  American 
practice  it  has  been  applied-  through  a  wider  range  and  has 
been  carried  farther  than  it  has  abroad,  not  only  in  mechan- 
ical but  also  in  structural  engineering  work. 

"  Mass  Production  "  is  a  term  often  used  to  describe  the 
method  of  wholesale  manufacture  resulting  from  speciali- 
zation and  standardization.  It  has  to  a  great  extent  re- 
placed the  practice  of  building  things  singly  to  fill  each 
individual  order,  just  as  the  shoe  factory  has  replaced  the 
old-time  cobbler.  All  sorts  of  things  from  carpet  tacks  up 
to  machine  tools,  dynamos,  steam  engines,  locomotives,  even 
battleships,  are  manufactured  in  quantity,  in  standard  pat- 
terns and  sizes,  and  are  placed  upon  the  general  market 
for .  each  customer  to  pick  out  the  pattern  and  size  that 
meets  his  particular  need.  It  is  clear  that  in  saving  of 
cost  of  manufacture  and  in  saving  of  time  to  the  buyer  the 
system  offers  great  advantages,  and  that  it  also  carries  an 
advantage  in  that  the  interchangeability  of  parts  character- 
izing standard  apparatus  greatly  facilitates  replacements  and 
repairs.  Three  important  commercial  advantages,  there- 
fore, are  inherent  in  the  system;  these  are  quality  for  price, 
promptness  of  delivery,  and  convenience  of  renewal  or  re- 
pair. 

These  great  tendencies  —  aggregation,  standardization 
and  specialization  —  are  all  interlocked.  It  was  only  when 


SPECIALIZATION    AND    STANDARDIZATION  3! 

a  large  number  of  operatives  had  been  collected,  working 
side  by  side  on  the  same  product,  that  it  became  possible 
as  well  as  desirable  to  bring  this  product  to  a  fixed  pattern, 
so  that  they  might  all  work  alike.  And  it  was  only  when 
this  had  been  done  that  the  parts  of  the  work  could  be 
separated,  that  is,  specialized,  so  that  in  a  spectacle  factory, 
for  example,  instead  of  every  man  making  complete  pairs 
of  spectacles,  one  lot  of  men  might  do  nothing  but  grind 
lenses,  another  group  might  do  nothing  but  polish  them, 
another  group  might  cut  them  to  shape,  another  group 
grind  the  edges,  another  group  make  the  frames,  and  still 
another  group  fit  the  finished  lenses  into  the  finished  frames.1 
The  men  in  each  group,  working  over  and  over  at  their 
limited  job,  can  do  it  much  faster  and  better  than  the 
original  all-around  man  did.  The  complete  process  is  thus 
cheapened,  because  each  part  of  it  has  been  cheapened;  the 
product  can  be  sold  at  a  lower  price  and  thus  find  larger 
markets;  the  increased  demand  at  the  lower  price  in  turn 
makes  it  necessary  to  employ  more  men.  The  manufactur- 
ing organization  thus  proceeds  to  a  larger  growth;  aggre- 
gation receives  a  new  impetus ;  and  so  the  cycle  turns  around 
again  and  again  upon  itself  with  increasing  speed  and  force. 

Although  the  immediate  effect  is  industrial  expansion  at 
an  increasing  rate  of  increase,  there  are  certain  further  re- 
sults that  are  not  favorable. 

The  first  unfavorable  result  is  the  disappearance  of  the 
generally  trained  all-around  skilled  artisan.  There  is  little 
opportunity  under  the  present  industrial  system  for  a  boy 
to  learn  a  trade  as  every  apprentice  learned  his  trade  in 
former  years.  Factory  or  shop  conditions  do  not  permit 
it,  and  the  wage  inducements  are  against  it.  A  machine 
tender  on  a  special  job  can  acquire  in  a  few  months,  or 
even  weeks,  enough  skill  in  his  limited  routine  to  earn  larger 

1  This  is,  of  course,  only  an  illustration.     The  making  of  spectacles  is 
specialized  to  an  immensely  greater  degree  than  this. 


32  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

wages  than  the  apprentice  can  hope  to  get  in  three  years, 
and  the  ordinary  beginner  does  not  and  perhaps  can  not 
look  beyond  this  fact. 

The  second  unfavorable  effect  is  that  although  general 
standardization  (that  is,  standardization  of  such  things  as 
weights  and  measures,  screw  threads,  sizes  of  wire,  sections 
of  steel  rails  or  structural  shapes)  is  wholly  desirable, 
private  standardization  (or  standardization  of  each  manu- 
facturer's special  product)  leads  to  inflexibility  and  re- 
sistance to  desirable  change  and  improvement.  Every- 
thing about  the  whole  establishment  —  drawings,  patterns, 
special  machinery,  processes,  operations,  materials  —  having 
once  been  standardized  and  installed  for  the  standard 
product,  can  be  changed  and  adapted  to  a  different  product 
only  at  considerable  expense  and  trouble.  It  is  a  matter 
of  common  complaint  that  our  American  manufacturers 
very  often  oppose  a  tacit  or  even  a  stubborn  resistance  to 
advancement;  that  they  buy  up  and  pigeon-hole  patents  for 
improvements  in  their  field;  that  they  seek  to  control  a 
market  by  masterful  salesmanship,  by  combinations  to 
regulate  products  and  prices,  rather  than  by  progressive 
betterments  of  output.  It  is  asserted  by  authorities  of  the 
highest  credibility  that  we  are  losing,  indeed  have  lost,  our 
mechanical  supremacy,  largely  through  over-standardization, 
over-adherence  to  standard  products  —  lost  it  to  Continental 
manufacturers  whose  less  complete  standardization  left 
them  more  elasticity,  both  of  equipment  and  of  mind,  and 
enabled  them  to  follow  improvement  after  improvement, 
until  in  excellence  of  product,  and  especially  in  efficiency  of 
product,  they  have  left  us  far  behind. 

It  would  not  be  right  to  leave  unmodified  the  impression 
that  the  disadvantages  or  the  dangers  just  suggested  are 
sufficient  to  overbalance  or  perhaps  even  to  balance  the 
benefits  to  industry  and  to  the  public  which  have  come  so 
far  through  standardization  and  specialization  in  manu- 


SPECIALIZATION    AND    STANDARDIZATION  33 

facturing.  The  low  cost  of  the  product  which  has  thus 
been  secured  has  put  it  within  the  reach  of  large  classes 
of  buyers  who  would  otherwise  have  been  unable  to  pur- 
chase. The  volume  of  manufactures,  many  of  which  in 
turn  become  the  basis  of  other  manufactures,  has  not  only 
filled  the  world's  stores  with  necessities,  conveniences,  luxu- 
ries, and  tools  of  livelihood,  but  has  made  it  possible  to 
provide  profitable  occupation  for  the  increase  of  the  throng- 
ing nations  who  are  filling  up  the  once-abundant  acres  of  the 
earth.  Specialization,  also,  has  furnished  well-paid  posi- 
tions in  vast  numbers  for  a  class  of  ability  which  could  not 
have  commanded  skilled  wages  and  which,  if  it  were  not 
for  this  opening,  would  have  had  to  be  content  with  the 
smaller  pay  of  common  labor.  As  against  these  great 
economic  and  social  advantages,  the  drawbacks  I  referred 
to  are  perhaps  small.  Still,  the  dangers  do  exist,  and  they 
may  increase  if  they  are  not  recognized  and  met.  It  is  part 
of  the  problem  of  the  industrial  engineer  of  the  present  and 
of  the  future  to  find  preventive  measures  against  the  in- 
flexibility —  the  ossification  —  which  threatens  us  when  we 
become  over-standardized,  and  against  the  dreadful  narrow- 
ing of  functions  and  the  deadly  monotony  of  occupation 
which  comes  to  us  when  our  work  is  over-specialized. 

We  need,  then,  some  countercheck  that  may  be  balanced 
against  specialization  and  standardization,  so  that  we  may 
enjoy  their  economic  advantages  without  incurring  evils  that 
lie  beyond.  This  countercheck  it  is  part  of  the  industrial 
engineer's  function  to  provide.  The  answer  appears  in  the 
doctrines  of  that  first  apostle  of  scientific  management, 
Frederick  W.  Taylor  —  in  the  gospels  also  according  to 
Harrington  Emerson  and  H.  L.  Gantt,  and  other  leaders  of 
advanced  thought  in  this  field.  It  is,  in  part,  the  exaltation 
of  specialization  —  its  investment  with  a  new  dignity,  with 
depth  in  place  of  breadth,  making  fwtensiveness  instead  of 
£#tensiveness,  the  goal  of  desirability;  and  with  this,  the 


34  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

recognition  of  a  standard  as  something  which  itself  must 
continually  advance  —  as  something  which  is  a  living  evo- 
lution and  not  a  rigid  crystallization. 

But  we  must  not  follow  this  thought  further,  as  we  have 
to  consider  another  condition  springing  from  aggregation 
as  well  as  from  specialization  and  standardization,  and  in- 
volving that  most  intensely  interesting  and  important  of  all 
the  problems  of  industrial  engineering  —  the  relation  be- 
tween employer  and  workman.  This  is  the  exchange  of 
the  workman's  independent  individuality  for  membership  in 
a  class.  Under  the  old  order  the  village  blacksmith  was 
a  character,  a  landmark,  a  figure  in  local  history  and  a 
theme  in  literature.  Under  the  new  order,  the  counter- 
part of  this  iron  worker  in  a  modern  smithshop  probably 
tends  a  forge  press  or  works  as  one  of  the  gang,  and  passes 
unnoticed  to  and  from  his  work  and  into  and  out  of  his 
employer's  service,  filling  a  job  designated  by  a  number, 
and  perhaps  not  even  known  by  his  own  name. 

And  now  we  come  to  a  very  important  point.  When  a 
plant  employs  thousands,  and  even  a  department  employs 
hundreds,  it  is  only  by  infrequent  and  improbable  chance 
that  a  superintendent  or  manager  can  observe  any  individual 
difference  among  his  many  employees.  Very  rarely  is  any 
attempt  made  even  to  keep  records  by  which  individual  per- 
formance can  be  studied  and  compared,  if  the  supervising 
official  should  be  anxious  to  make  such  comparison.  The 
man  of  superior  efficiency,  even  though  he  may  do  two 
or  three  times  as  well  as  the  inferior  workman  beside  him, 
has  little  chance  of  recognition  and  practically  no  chance 
of  reward  proportioned  to  his  worth.  His  position  is  fixed, 
his  wage  is  fixed,  by  his  class  and  occupation.  As  Mr. 
Gantt  has  pointed  out,  it  is  inevitable  that  under  such  con- 
ditions the  exertions  of  the  more  energetic  man  should  be 
turned  to  the  attempt  to  raise  the  class  rate.  It  is  inevitable 
that  the  efficient  man  should  say:  "  I  can't  make  any  more 


SPECIALIZATION    AND    STANDARDIZATION  35 

money  by  laying  more  brick  a  day  than  Smith  or  Brown  or 
Jones;  but  if  I  get  Smith  and  Brown  and  Jones  and  all  the 
boys  to  join  in  a  demand  for  higher  wages  for  bricklayers, 
we  can  get  them." 

A  direct  result  of  the  submergence  of  the  individual  in  a 
class  is  the  elevation  of  the  class  into  the  attitude  of  an 
individual  in  its  demand  for  recognition.  But  the  class 
demands  larger  pay,  not  as  the  equivalent  of  larger  work, 
but  as  a  tribute  to  larger  power.  As  a  rule,  the  amount  of 
work  done  by  each  man  tends  downward  to  the  level  of  the 
least  efficient;  while  the  wages  secured  by  the  class  through 
collective  bargaining  tend  upward  toward  the  maximum  that 
can  be  grasped  and  held  by  the  power  of  the  union.  This 
is  immensely  unsatisfactory  to  the  employer,  but  it  is  the 
logical  consequence  of  conditions  that  the  employer  —  not 
the  employee  —  has  created. 

One  more  great  difficulty  confronting  the  industrial 
engineer  in  the  administration  of  the  manufacturing  sys- 
tem is  the  material  counterpart  of  this  impersonalizing  of 
the  man.  It  is  the  disindividualizing  of  the  work,  or,  to 
use  the  more  familiar  language  of  the  shop,  of  the  job. 
As  the  practice  of  specialization  already  referred  to  divides 
all  operations  among  different  workmen  and  departments, 
the  manufacture  of  any  single  thing,  whether  this  thing 
is  a  locomotive  or  a  watch  or  a  bridge  or  a  ton  of  copper 
or  a  pair  of  shoes  or  a  train  mile,  starts  in  many  different 
places  by  the  apparently  independent  acts  of  many  different 
men.  Further,  each  of  these  separate  acts,  which  is  going 
to  be  co-ordinated  with  other  acts  so  as  to  produce  some 
completed  article,  each  of  these  separate  acts  is  not  a  sole 
individual  act,  but  is  one  of  a  series  of  repeated  identical 
acts  performed  by  the  workmen.  I  hope  I  make  this  point 
clear.  Each  unit  of  product  is  built  up  out  of  manifold 
dements  gathered  from  the  work  of  many  men.  The  work 
of  each  man  is  divided  and  subdivided  among  many  units 


36  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

of  product.  The  lines  of  movement  between  the  many 
workmen  on  the  one  hand,  and  the  many  units  of  product 
on  the  other  hand,  are  an  enormously  complex  interlace- 
ment. The  industrial  engineer  must  control  the  orderly 
guidance  of  this  interlacement;  he  must  see  not  only  that  the 
elementary  producers  do  their  work  and  do  it  efficiently, 
but  that  the  elements  thus  produced  are  kept  in  the  right 
balance  and  proportion  and  are  combined  to  form  the  right 
product  at  the  right  place  and  at  the  right  time.  In  every 
direction,  then,  the  spaces,  forces,  institutions  of  industry 
have  far  outgrown  the  limits  of  the  man.  It  seems  as 
though  the  world  of  manufacturing  were  no  longer  one  of 
persons,  but  of  classes,  departments,  systems.  And  yet,  in 
all  human  affairs  the  originating  and  guiding  power  is  the 
individual  brain.  Nothing  can  take  its  place.  However 
complex  the  order,  it  must  rest  upon  a  systematic  support 
of  human  intelligences  and  wills.  And  the  method  of  co- 
ordination by  which  many  minds  and  hands  carry  on  one 
of  the  vast  industrial  enterprises  of  the  day  is  organization. 
Its  fundamental  principles  and  methods  will  be  taken  up 
in  the  following  chapter. 


PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 


CHAPTER  III 
PRINCIPLES  OF  INDUSTRIAL  ORGANIZATION 

WE  have  seen  so  far  that  the  introduction  of  power  and 
machinery  first  inaugurated  the  manufacturing  era, 
and  next  gave  rise  to  certain  tendencies  and  policies  in  manu- 
facturing. The  most  important  of  these  were  growth  in 
size  of  the  manufacturing  plant,  and  development  of  manu- 
facture on  a  wholesale  scale;  and  in  connection  with  this 
the  re-apportionment  of  duties  among  the  artisans  employed, 
so  that  it  has  become  general  for  each  to  do  only  some 
limited  special  part  of  the  whole  process  of  manufacture, 
and  to  do  this  by  repetitive  reproduction  of  a  fixed  pattern. 
While  this  has  vastly  reduced  costs  of  production  and 
facilitated  manufacture  per  se,  it  is  evident  that  from  the 
works-management  point  of  view  it  introduces  very  serious 
problems.  One  is  merely  quantitative;  the  great  size  of  a 
modern  factory  makes  it  impossible  for  the  manager  to 
oversee  it  all  in  person.  Another  is  the  division  of  opera- 
tions among  different  workmen  or  departments.  Each 
single  thing  manufactured  starts,  or  may  start,  in  as  many 
different  places  as  it  has  parts,  each  part  again  being  not 
an  individual  but  one  of  a  lot  of  like  parts;  and  such  a 
lot  of  identical  parts,  though  they  start  off  together  through 
the  shop,  may-  later  on  be  divided  and  sub-divided  and  di- 
verge to  various  finished  products  if  they  happen  to  be 
standard  to  more  than  one  pattern.  The  workman  actually 
engaged  on  the  job  has  no  idea  of  the  destination  of  his 
work  and  no  responsibility  beyond  finishing  his  own  indi- 
vidual job  to  the  standard  pattern  and  quality,  and  perhaps 
within  some  standard  time. 

39 


40  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

Take  a  pocket  knife  for  illustration.  It  has  a  blade  of  a 
certain  size  and  shape,  which  probably  is  used  not  only  in 
the  one  pattern  of  knife  we  happen  to  be  considering,  but 
also  in  some  two-bladed  and  some  four-bladed  knives  made 
by  the  same  factory.  It  has  certain  German  silver  pieces, 
probably  drop-forged,  possibly  not  made  by  the  knife  manu- 
facturer at  all,  but  bought  in  quantity  from  some  other 
maker.  It  has  some  bone  or  pearl  pieces,  still  more  prob- 
ably purchased  from  an  outside  manufacturer  and  used  in 
a  number  of  different  styles  of  knife,  sold  at  various  prices. 
It  has  certain  steel  springs,  and  thin  brass  plates,  and  a 
number  of  rivets.  All  these  parts  in  hundreds  and  thou- 
sands are  passing  through  the  factory,  and  being  assembled 
into  knives  just  like  the  one  we  happen  to  take  as  an  ex- 
ample, andJnto  other  knives  of  more  or  less  varying  design, 
in  a  continuous  stream  year  in  and  year  out.  Each  indi- 
vidual workman,  as,  for  example,  the  man  grinding  the 
blade,  sees  no  more  than  his  own  job.  But  if  the  factory 
is  to  succeed,  John  Smith's  order  for  one  dozen  knives  like 
the  one  we  have,  to  be  shipped  to  Topeka,  Kansas,  must  go 
forward  at  a  specified  time,  and  must  be  billed  to  him  at 
a  price  that  pays  a  fair  profit,  and  still  is  low  enough  to 
meet  competition  from  other  knife  factories. 

The  manufacture  of  a  knife  is  a  comparatively  simple  in- 
stance. In  the  case  of  some  mechanical  products  such  as 
typewriters  and  automobiles,  for  example,  there  are  hun- 
dreds and  thousands  of  separate  pieces  to  be  routed  through 
the  factory,  worked  upon,  and  finally  assembled  into  a  unit 
of  product.  The  paths  of  the  several  parts  are  something 
like  the  paths  of  letters  in  the  mail;  a  myriad  of  units  from 
scattered  sources  are  gathered  into  larger  streams,  travel 
together  so  long  as  their  paths  can  be  economically  united, 
and  then  diverge  again  in  new  groupings  to  various  indi- 
vidual destinations.  It  is  utterly  impossible  for  any  one 
person  to  follow  each  transaction,  and  yet  a  positive  and 


PRINCIPLES    OF    INDUSTRIAL    ORGANIZATION  4! 

sure  result  must  be  secured.  And  this  is  the  function  of 
organization.  System  must  do  what  the  individual  can  not 
accomplish. 

It  looks  like  an  impossibly  intricate  problem;  and  yet  if 
we  look  again  at  the  illustration  used  just  above  —  the  Post- 
Office  —  we  see  that  a  fixed  organization  and  fixed  systems 
of  collection,  transportation,  and  distribution  produce  a  re- 
sult in  exact  accordance  with  our  plan  and  desire,  and  with 
almost  infinite  variety  and  elasticity  in  meeting  that  plan 
and  desire.  This  is  an  illustration  only  —  not  a  close  par- 
allel; for  in  manufacturing  we  have  the  added  condition 
that  each  item  handled  is  or  may  be  worked  upon  and 
changed  during  its  movement  through  the  factory,  and 
in  all  industry  all  operations  and  processes  must  be  con- 
ducted with  strict  regard  to  economy  and  efficiency.  We 
have  not  an  unlimited  Government  appropriation  behind 
us,  and  we  have  the  neighbor  across  the  way  competing  with 
us  and  by  close  bidding  forcing  prices  down  so  that  we 
have  to  consider  even  small  fractions  of  a  cent.  Still,  the 
illustration  helps  us  to  see  what  organization  and  system  do 
accomplish. 

Organization  is  fundamentally  a  practical  plan  for  sub- 
dividing the  conduct  of  any  undertaking  into  parts,  each 
small  enough  to  be  handled  by  an  individual,  by  a  method 
that  enables  all  to  work  together.  The  efficiency  of  organi- 
zation depends  on  the  wisdom  and  skill  with  which  this  di- 
vision is  made  —  the  success  secured  not  only  in  selecting 
efficient  individuals,  but  in  arranging  that  each  may  work 
at  his  best  efficiency,  and  all  work  may  keep  balance  and 
harmony  in  achieving  the  desired  result. 

There  are  two  great  principles  in  organization  commonly 
known  as  line  and  staff,  or,  to  use  the  terms  preferred  by 
some  industrial  engineers,  "  military  "  1  and  "  functional." 

1  The  use  of  the  term  "  military  "  in  this  sense  is  misleading.     Military 
organization  has  long  comprehended  both  line  and  staff.     Indeed,  as  the 


42  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

Line  organization  is  essentially  simple,  mathematical 
subdivision.  An  army  under  a  major-general  is  divided  into 
brigades  under  brigadier-generals;  each  brigade  is  divided 
into  regiments,  under  their  colonels,  and  each  regiment  into 
battalions  under  lieutenant-colonels  or  majors;  each  bat- 
talion is  divided  into  companies  under  captains;  each  com- 
pany is  again  subdivided  under  its  lieutenants,  and  so  on 
down  to  the  corporal  with  his  squad.  Promotion  is  step 
by  step  upward;  the  private  may  hope  to  be  made  a  corporal, 
a  sergeant,  a  lieutenant,  a  captain,  a  major,  a  colonel,  a 
general.  The  lines  of  authority  and  responsibility  run  con- 
tinuously through  the  whole  body  from  top  to  bottom,  as 
the  veins  of  the  leaf  gather  to  the  stalk,  and  many  leaf- 
stalks to  the  twig,  and  many  twigs  to  the  branch,  and  many 
branches  to  the  trunk;  and  veins  and  stalk  and  twig  and 
branch  and  trunk  have  practically  similar  duties  to  perform 
in  the  life  and  growth  of  the  tree. 

Staff  organization  is  a  division  according  to  functions  — 
division  by  which  one  military  department  does  all  the 
engineering  work  for  the  whole  army,  another  supplies  all 
clothing,  or  rations,  etc.  It  is  the  division  by  which  the 
roots  absorb  moisture  and  salts  from  the  earth,  the  leaf 
cells  make  chlorophyll,  the  sap  carries  the  products  of  these 
laboratories  to  the  cell-building  processes  of  the  tree.  Staff 
functions  are  co-ordinate  and  co-operative,  but  they  do  not 
stand  to  one  another  in  any  order  of  ascending  and  descend- 
ing scale.  The  captain,  simply  as  captain,  ranks  and  com- 
mands the  lieutenant;  that  is  a  line  relation.  But  the  en- 
gineer, as  engineer,  does  not  command  the  quarter-master; 
the  quarter-master  does  not  rank  and  command  the  surgeon; 
the  leaf  does  not  rank  the  root;  that  is  a  staff  relation. 
On  the  other  hand,  the  captain  is  primarily  responsible  only 

oldest  of  the  "  noble  professions,"  the  military  long  since  discovered  and 
applied  many  of  the  principles  lately  reannounced  by  investigators  of 
"  scientific  management." 


PRINCIPLES    OF    INDUSTRIAL    ORGANIZATION  43 

for  his  own  company;  each  branch  of  the  tree  supports  only 
its  own  twigs  and  each  twig  its  own  leaves.  That,  again, 
is  line  organization.  The  scope  of  the  individual  is  limited 
in  area,  but  unlimited  in  responsibility  within  that  area. 
But  the  engineer  builds  a  bridge  for  the  entire  army  — 
general,  colonels,  captains,  and  privates;  each  root  and  leaf 
contributes  its  share  to  the  life  of  the  entire  tree.  That  is 
staff  organization.  The  responsibility  of  the  individual  is 
unlimited  in  area,  but  limited  to  one  function  throughout 
that  area. 

The  functions  of  staff  and  line  are,  therefore,  not  an- 
tagonistic; they  are  not  alternative  and  rival  systems  of 
organization,  between  which  we  may  choose  and  say  we 
will  adopt  this  or  that  and  refuse  the  other.  Line  organi- 
zation is.  essential  to  discipline  and  essential  to  the  con- 
tinuous existence  of  the  whole  body.  If  the  general  re- 
tires there  must  be  a  colonel  to  succeed  him;  if  the  captain 
is  killed  in  action,  the  lieutenant  must  take  command  of  the 
company,  or  the  men  are  scattered  and  lost.  Staff  organi- 
zation is  essential  to  efficiency,  each  branch  of  it  in  its  own 
particular  function.  If  the  commissary  fails  and  there  is 
no  food  for  the  troops,  the  engineer  can  not  make  up  for  the 
deficiency  by  vigorously  building  bridges.  Each  staff  must 
have  a  line  organization  within  itself  for  discipline  and 
continuity;  but  every  complete  organization  must  embody 
the  principles  of  both  line  and  staff  if  we  are  to  secure  the 
best  results,  the  staff  supplying  expert  functional  guidance, 
applied  through  the  line's  direct  control. 

In  manufacturing  and  industrial  operations  generally  there 
is  no  lack  of  development  of  line  organization,  but  there 
is  too  often  a  very  meagre  appreciation  of  the  valuable  re- 
sults attainable  by  far-reaching  applications  of  the  staff 
principle.  This  is  generally  characteristic  of  modern  in- 
dustrial concerns,  and  it  is  here  that  we  are  likely  to  dis- 
cover weakness  when  the  attainment  of  high  efficiency  is 


44  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

desired.  Under  line  organization,  the  foreman  is  supposed 
to  decide  every  question  for  the  men  under  his  particular 
control  —  employment  or  discharge,  wages,  jobs,  diffi- 
culties with  materials,  difficulties  with  tools,  difficulties  with 
processes,  difficulties  with  other  employees.  If  the  ques- 
tion is  too  big  for  the  foreman  he  goes  to  the  superintendent, 
and  if  it  is  too  much  for  the  superintendent  he  puts  it  to  the 
general  manager,  and  it  may  finally  go  to  the  board  of 
directors.  The  assumption  under-lying  is  akin  to  the  sup- 
position that  the  corporal  must  be  a  better  shot  than  the 
private,  and  the  sergeant  than  the  corporal,  and  the  lieuten- 
ant than  the  sergeant,  and  so  on  up  to  the  general  in  com- 
mand. It  is  one  of  the  very  strong  features  of  what  has 
lately  been  called  "  scientific  management,"  that  in  its  study 
of  operations,  its  preparation  of  instructions,  and  its  formu- 
lation of  schedules,  it  introduces  staff  co-operation  to  a  yet 
larger  extent  through  the  work  of  expert  instructors.  We 
need  a  much  fuller  recognition  of  this  principle,  not  as  the 
occasional  or  unusual  accompaniment  of  the  introduction 
of  a  new  system,  but  as  an  organic  part  of  our  regular  sys- 
tem. We  need  to  incorporate  the  staff  idea  into  our  settled 
industrial  policy,  so  that  expert  direction  as  to  relations 
with  employees,  as  to  equipment  and  its  maintenance,  as  to 
materials,  as  to  methods  and  conditions,  as  to  performance, 
shall  operate  throughout  our  works  not  in  series  but  in 
parallel,  and  shall  be  available  at  every  point,  to  every  man, 
in  every  job,  at  every  time. 

The  average  foreman  is  not  —  could  not  be  —  able  for 
all  this.  He  is  rarely  strong  in  even  one  of  the  three  parts 
into  which  Mr.  Gantt  divides  the  labor  problem  —  finding 
out  what  is  the  proper  day's  task  for  a  man  suited  to  the 
work,  finding  out  what  is  the  compensation  needed  to  in- 
duce the  man  to  do  that  work,  and  planning  so  that  the  man 
can  do  the  work  continuously  and  efficiently.  These  are 
the  things  that  control  the  result  of  all  our  industrial  ven- 


PRINCIPLES    OF    INDUSTRIAL    ORGANIZATION  45 

tures.  After  we  have  laid  our  plans  and  bought  and  in- 
stalled our  machines  and  assembled  our  forces  and  organized 
our  whole  complicated  establishment,  with  its  investment 
of  money  and  hopes  and  expectations,  the  result  depends 
very  largely  on  the  efficiency  of  the  individual  workman. 
The  cultivation  of  high  efficiency  is  a  matter  of  vast  im- 
portance not  merely  to  the  invested  capital,  but  to  the  eco- 
nomic and  social  future  of  the  country.  It  has  been  left 
in  the  past  very  largely  to  the  foreman,  and  because  he  did 
not  know  and  could  not  know  the  conditions  that  produce 
inefficiency,  and  the  means  of  cultivating  efficiency,  the  out- 
put of  the  average  worker  (in  the  estimate  of  very  careful 
students  of  the  question)  is  not  one-third  of  what  it  should 
be  and  can  be  without  any  increased  tax  on  the  body  or 
brain  of  the  operative.  Here  is  an  opportunity  for  the 
conservation  of  human  resources  which  comes  nearer 
home  even  than  the  conservation  of  coal  or  of  water 
powers. 

The  defect  of  the  average,  usual,  old-line  organization 
is  that,  in  the  desperate  speed  of  industrial  expansion,  it  has 
tried  to  meet  the  onslaught  of  conditions,  the  mere  quanti- 
tative problem  of  expansion,  by  throwing  itself  into  the  only 
form  with  which  humanity  (as  the  heritage  of  centuries  of 
fighting)  is  intimately  familiar  —  the  military  form.  The 
ordinary  philosophy  of  management  is  (to  borrow  a  defini- 
tion from  Harrington  Emerson)  "  autocratic  authority  at  the 
top  —  delegated  authority  and  imposed  responsibility  all 
down  the  line,  and  anarchy  everywhere."  Just  as  in  em- 
ergencies each  man  below  turns  to  the  man  above,  so  in 
ordinary  routine  the  order  is  reversed.  The  president  "  puts 
it  up  "  to  the  general  manager,  the  general  manager  "puts 
it  up  "  to  the  superintendent,  the  superintendent  "  puts  it 
up  "  to  the  foreman,  the  foreman  "  puts  it  up  "  to  the  work- 
man. The  work  is  finally  done  by,  and  the  efficiency  of 
actual  execution  is  usually  dependent  upon,  the  man  of  lowest 


46  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

capacity,  of  least  knowledge,  of  least  possible  breadth  of 
vision,  of  least  power  to  control  conditions  —  that  is,  the 
actual  workman.  His  only  source  of  all  help  and  instruc- 
tion is  usually  but  one  step  higher  in  knowledge  or  in  power, 
and  that  is  a  job  boss  or  foreman. 

The  entire  ideal  of  industrial-engineering  organization, 
of  "  scientific  management,"  as  it  has  lately  been  called,  is 
diametrically  different.  It  is  the  study  of  the  plans  for 
executing  the  work  and  of  the  ultimate  operations  of  the 
work  itself  by  the  highest  expert  skill  obtainable ;  the  defini- 
tion of  the  best  means  for.  doing  the  work  by  the  most 
competent  specialist  obtainable;  the  reduction  of  these  re- 
sults to  standard  definitions  and  standard  instructions;  the 
provision  of  the  best  apparatus  for  doing  the  work,  and  its 
maintenance  in  the  best  condition,  again  by  specialized 
skill;  the  careful  training  of  the  workmen  by  competent 
instructors  to  do  the  job  in  the  best  way  with  these  best 
appliances,  and  in  the  minimum  of  time;  lastly,  the  provision 
of  some  incentive  sufficient  to  secure  the  workman's  co- 
operation, to  make  him  willing  to  do  the  work  in  the  way 
and  in  the  time  that  have  been  studied  out.  This  incentive 
may  be  a  day  wage,  a  piece  rate,  a  differential  piece  rate, 
a  bonus,  a  premium,  or  a  purely  sentimental  reward  — "  an 
imaginary  value,"  as  Dr.  Junge  calls  it.  These  wage 
methods  are  not  fundamental  institutions  in  themselves,  as 
they  are  sometimes  mistakenly  supposed  to  be.  They  are, 
or  should  be,  only  the  last  step  in  a  far  broader  philosophy 
of  production.  Scientific  management,  then,  involves  these 
three  great  steps :  First,  analysis  —  or  the  accurate  estima- 
tion of  productive  elements  and  preventable  wastes;  second, 
standardization  of  attainable  maxima  of  performance,  and 
establishment  of  conditions  by  which  the  men  may  practi- 
cally reach  these  maxima ;  third,  and  last,  devising  an  incen- 
tive by  which  the  interest  of  the  employee  is  visibly  and 
convincingly  advanced,  parallel  with  the  interest  of  the  em- 


PRINCIPLES    OF    INDUSTRIAL    ORGANIZATION  47 

ployer,  as  the  workman  approaches  and  reaches  or  even  sur- 
passes the  standards  set. 

To  sum  up  in  three  words:  The  elements  of  scientific 
management  are  analysis,  standardization,  incentive. 

The  difference  between  it  and  ordinary  management  is 
that  it  provides  for  these  things,  while  ordinary  manage- 
ment provides  only  for  the  transmission  of  orders  and 
maintenance  of  discipline,  with  little  or  no  instruction  or 
assistance  to  the  workers. 

To  put  it  in  still  another  way:  by  co-ordinating  the  two 
elementary  ideals  of  management  —  line,  for  permanence, 
authority,  discipline;  staff,  for  development  of  high  func- 
tional efficiency — "scientific  management"1  restores,  both 
to  the  job  and  the  man,  the  identity  —  the  individualism  — 
which  under  ordinary  management  is  lost  by  a  policy  of 
wholesale  dealings  and  mass  relations. 

At  the  present  time  two  leading  schools  of  scientific 
management  seem  to  be  forming,  characteristically  asso- 
ciated with  the  names  of  F.  W.  Taylor  and  Harrington 
Emerson.  It  is  hardly  fair  to  the  subject  or  to  the  reader 
to  attempt  to  point  out  in  a  brief  paragraph  their  distinctive 
doctrines,  for  each  requires  and  has  been  given  by  its  chief 
sponsor  an  exposition  reaching  the  dimensions  of  a  fair 
sized  book.2  As  an  introduction  or  an  incentive  to  further 
study,  however,  the  following  summary  is  offered: 

The  Taylor  system  displaces  ordinary  management  by 
the  introduction  of  a  highly  specific,  distinctly  defined 

1  The  term  "  scientific  management "  is  used  with  some  reluctance  be- 
cause of  its  general   current  employment  in  a   restricted  and   specialized 
sense.     Scientific    management    means    only    the    application    of    scientific 
principles   and   methods  to  the   work  of   management.     The   sciences   in- 
volved may  be,  and  are,  several.     Scientific  management  can  not  be  re- 
duced   to    a    formalized    and    formulated    system,    although    a    systematic 
scheme  of  management  may  be  based  on  scientific  principles. 

2  See  "Shop    Management,"  by  F.  W.  Taylor;  Trans.  Am.  Soc.   M.  E. 
June,  1903.     No.  1003.     See  also  "  Efficiency  as  a  Basis  for  Operation  and 
Wages,"  Harrington  Emerson ;  The  Engineering  Magazine. 


48  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

"  functional  force."  The  performance  of  work  is  first  di- 
vided into  two  phases  —  planning  and  execution.  Each  of 
these  phases  is  separated  into  four  major  functions.  The 
four  functional  representatives  in  the  planning  department 
are  "  the  order  of  work  clerk,"  "  the  instruction  card  man," 
"  the  time  and  cost  clerk,"  and  "  the  shop  disciplinarian." 
The  four  functional  representatives  in  the  active  work  of 
the  shop  are  "  the  gang  boss,"  "  the  speed  boss,"  "  the  in- 
spector," and  "  the  repair  boss."  There  may  be  one  or 
many  representatives  of  each  function,  depending  upon  the 
frequency  with  which  their  function  necessarily  brings  them 
in  contact  with  the  men;  but  within  any  one  function,  the 
workman  looks  to  the  particular  boss  of  that  function  for 
his  orders  and  assistance.  The  workman  takes  orders  from 
eight  different  bosses  instead  of  from  one  only  as  under  the 
ordinary  system  of  management.  The  details  of  the  sys- 
tem are  also  highly  specific,  as,  for  example,  that  all  work, 
tools,  and  equipment  parts  are  symbolized,  the  performance 
of  every  operation  is  charted,  all  instructions  are  written, 
etc.  The  salient  feature,  however,  is  that  the  old  line 
organization  is  discarded,  and  eight  functional  lines  are 
put  in  its  place. 

Emerson  leaves  the  old  line  intact,  but  supplements  it 
with  an  expert  staff,  who  bring  to  bear  highly  specialized 
knowledge  and  skill  upon  the  various  elements  of  operation 
that  are  susceptible  to  improvement.  These  might  be,  for 
example,  such  matters  as  the  economical  burning  of  fuel,  the 
custody  and  issue  of  materials,  the  cutting  of  metals,  the 
care  of  machinery  and  equipment;  these  are  random  illustra- 
tions only.  The  staff  organization  would  be  specialists  in 
the  subjects  of  largest  influence  upon  economy  of  operation, 
but  their  knowledge  would  be  applied,  not  by  direct  orders 
to  the  workmen,  but  by  guidance,  instruction,  suggestion, 
counsel,  to  the  regular  line  officials.  Emerson's  faith  is 
not  in  methods,  but  in  principles  of  efficiency  and  their  pur- 


PRINCIPLES    OF    INDUSTRIAL    ORGANIZATION  49 

suit  by  a  line-directed  and  staff-guided  organization,  adapted 
to  the  circumstances  and  conditions  of  any  given  operation. 
These  principles  of  efficiency  are:  Ideals;  Common-Sense 
and  Judgment;  Competent  Counsel;  Discipline;  the  Fair 
Deal;  Reliable,  Immediate  and  Accurate  Records;  Plan- 
ning and  Dispatching;  Standards  and  Schedules;  Standard- 
ized Conditions;  Standardized  Operations;  Written  Stand- 
ard-Practice Instructions;  and  Efficiency  Reward.1 

In  the  acceptance  of  fundamental  ideas  and  foundational 
data  there  is  no  important  difference  between  the  two 
schools.  In  methods  of  practice  there  is  a  very  wide  dif- 
ference, the  latter  being  much  the  more  elastic.  One  of  the 
first  precepts  of  the  Taylor  school  is  that  no  half-measures 
are  possible.  The  system  must  be  adopted  in  its  entirety  or 
let  entirely  alone.  From  Emerson's  doctrine  of  efficiency, 
on  the  other  hand,  follows  the  deduction  that  betterment 
may  proceed  by  almost  infinite  gradations,  depending  on  the 
willingness  and  thoroughness  with  which  the  principles  of 
efficiency  are  accepted  and  applied. 

In  the  early  sections  of  this  chapter  organization  and 
system  were  spoken  of  as  being  effective  in  controlling  large 
operations  that  are  beyond  the  grasp  of  the  individual. 
System  is  the  method  by  which  organization  works  to  se- 
cure desired  results  and  to  maintain  control  of  every  item 
of  work  in  hand  at  all  times.  If,  ignoring  the  conventional 
mode  of  analyzing  industrial  organization,  we  look  at  it 
from  the  point  of  view  taken  in  the  alliterative  divisions  of 
the  field  listed  in  the  opening  chapter,  the  applications  of 
system  in  which  we  are  most  interested  in  industrial  en- 
gineering will  relate  generally  to  six  cardinal  points. 
First,  the  general  institutions  and  form  of  management; 
second,  the  provision  and  custody  of  material;  third,  the 
handling  and  payment  of  labor  or  u  men  ";  fourth,  the  care 

"The  Twelve  Principles  of  Efficiency;"  The  Engineering  Magazine. 
June,  1910,  et  seq. 


50  PRINCIPLES   OF   INDUSTRIAL    ENGINEERING 

and  maintenance  of  tools  and  machinery;  fifth,  the  determi- 
nation and  direction  of  operations,  or  manufacturing  meth- 
ods; sixth,  the  recording  of  expenditures  and  costs  —  that 
is,  of  money.  Our  seventh  "  M  " — markets  —  belong  to 
the  commercial  or  sales  organization,  and  though  equally 
susceptible  to  scientific  treatment  are  not  included  in  the 
scope  of  this  study. 

System  is  an  ideal  that  is  more  or  less  perfectly  embodied 
in  innumerable  concrete  "  systems  "  for  handling  each  and  all 
of  these  things.  There  is  no  universally  correct  and  spe- 
cific way  of  doing  any  one  of  them.  Always  beware  of 
the  man  with  the  panacea.  Ideals  and  principles  are  funda- 
mental and  fixed;  methods  and  systems  must  vary  with  con- 
ditions. The  systems  that  will  succeed  in  any  given  case 
depend  on  the  organization  adopted  in,  and  the  circum- 
stances surrounding,  that  case.  Many  misfits  and  troubles 
have  resulted  from  attempts  to  force  cut-and-dried  systems 
that  had  succeeded  under  one  set  of  conditions  and  in  one 
environment,  upon  a  plant  differently  organized  and  en- 
vironed to  which  these  systems  were  not  adapted  at  all. 
There  are,  nevertheless,  fixed  principles  that  can  be  formu- 
lated and  should  be  observed  in  any  system  we  may  adopt  in 
any  individual  case. 

Management,  in  its  broad  sense,  includes  everything  in 
the  entire  range  of  this  discussion.  In  its  limited  sense  of 
the  governing  and  directing  body  it  is  ordinarily  (as  al- 
ready said)  dominated  too  exclusively  by  ideals  of  "  line  " 
subdivision  with  insufficient  "  staff "  co-ordination.  Very 
generally,  however,  a  broad  staff  or  functional  segregation 
appears  in  the  adoption  of  what  is  called  the  "  three-column 
form"  of  organization;  that  is,  the  management  is  carried 
on  by  three  co-ordinated  departments  —  financial,  manu- 
facturing, and  commercial.  The  division  is  elementary  and 
logical.  First  get  your  money,  next  turn  it  into  manu- 
factured wares,  then  sell  the  product.  Below  this  step, 


PRINCIPLES    OF    INDUSTRIAL    ORGANIZATION  51 

however,  ordinary  management  is  unstandardized.  All  ef- 
fective work  in  the  improvement  of  efficiency  must  begin 
here,  either  by  replacing  the  existing  arrangement  by  a 
"  functional  force  "  or  by  "  co-ordinating  with  it  in  an  ex- 
pert staff." 

Materials  are  generally  supplied  through  a  purchasing 
department,  whose  duty  it  is  to  provide  all  materials  and 
supplies  in  the  quantity  and  quality  required  by  the  produc- 
tion department,  at  the  most  advantageous  price  possible; 
and  to  verify  its  purchases  to  the  auditing  department  for 
payment.  Materials  when  received  pass  into  the  custody  of 
the  stores  department,  at  the  head  of  which  is  an  official 
known  as  the  storeskeeper  or  storekeeper.  In  a  large 
plant  there  will  probably  be  a  general  storeskeeper  and 
a  sufficient  number  of  division  or  assistant  storeskeepers  and 
clerks  to  handle  the  work.  The  duty  of  the  stores  depart- 
ment is  to  keep  materials  in  safe  custody  and  orderly  ar- 
rangement, to  supply  them  to  the  departments  of  the  fac- 
tory on  requisitions  from  proper  authority,  to  account  for 
their  issue,  to  receive  them  again,  in  partly  finished  or  fin- 
ished condition,  if  the  routine  of  the  factory  operation  so 
requires,  and  to  maintain  an  inventory  of  all  material  on 
hand.  Sometimes  finished  product  is  delivered  from 
stores  on  order  of  the  sales  department;  sometimes  the  ship- 
ping department  is  distinct.  Obviously  both  purchasing  de- 
partment and  stores  department  must  be  in  close  touch  with 
the  needs  of  the  production  department,  but  the  discretion 
given  either  of  them  to  query  or  to  anticipate  production- 
department  requisitions  or  wants  varies  greatly  in  different 
cases,  and  may  be  determined  by  the  policy  of  the  concern 
or  the  personality  of  the  officials  chiefly  concerned.  It  is 
not  uncommon,  however,  for  the  stores  department  to  be 
charged  with  responsibility  for  maintaining  at  all  times  a 
sufficient  stock  not  only  of  raw  materials  but  of  finished 
product.  The  manufacturing  department  then  works  al- 


52  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

ways  and  only  upon  orders  issued  by  the  stores  depart- 
ment. 

The  records  of  materials  are  usually  kept  by  requisitions 
made  out  in  multiple,  separate  copies  going  to  the  manu- 
facturing and  accounting  officials  immediately  concerned, 
and  by  entering  each  addition  or  withdrawal  in  books  or  on 
cards  accompanying  each  lot  or  kind  of  material  carried  in 
stock.  The  movement  of  material  through  the  factory  is 
usually  directed  and  recorded  by  tags,  accompanying  each 
piece  or  lot,  and  distinguished  by  serial  numbers  connecting 
them  with  the  order  or  job  to  which  they  apply.  Multiple 
copies  of  these  memoranda,  sent  ahead,  serve  to  notify  re- 
sponsible officials  further  down  the  line  what  to  look  for, 
and  act  as  detectors  for  any  delay  or  discrepancy  in  arrival. 
This  system  is  commonly  called  stock  tracing. 

Material  in  process  of  manufacture  is  commonly  called 
either  stock  or  stores.  The  terms  are  rather  loosely  used, 
but  the  best  authority  prescribes  the  use  of  the  term 
"  stores  "  for  raw  material  and  "  stock  "  for  finished  product. 
This  usage,  however,  is  not  universal,  and  very  often 
"  rough  stores  "  or  "  raw  stores  "  is  used  to  designate  un- 
manufactured material,  and  "  finished  stores,"  manufactured 
material. 

Labor,  which  was  listed  as  the  third  cardinal  subject  of 
systematic  handling,  is  very  diversely  managed.  Some  large 
concerns  have  a  regular  labor  department  or  employment 
agency  where  applications  are  filed  and  examined,  and  by 
which  men  are  engaged  in  such  numbers  and  at  such  times 
as,  the  managing  officials  direct.  In  other  cases  the  heads 
of  departments  make  their  own  engagements  and  dis- 
charges. Usually  the  discipline  and  work  assignments  of 
each  employee  depend  upon  his  immediate  superior,  who 
may  be  a  very  minor  official,  such  as  a  gang  boss  or  sub- 
foreman.  Many  disciplinarians  consider  that  the  power  of 
promotion  or  discharge  is  necessary  to  the  man  in  imme- 


PRINCIPLES    OF    INDUSTRIAL    ORGANIZATION  53 

diate  command.  There  are,  however,  great  dangers  of  in- 
justice, and  of  the  exercise  of  favoritism  or  spite  disastrous 
to  efficiency  of  the  working  force  as  a  whole,  if  too  much 
power  is  entrusted  to  petty  officers.  I  think  this  is  on  the 
whole  the  safer  view  to  adopt.  The  assignment  of  work, 
even,  when  not  determined  by  general  routine,  is  now 
sometimes  advantageously  directed  from  a  central  works 
office,  where  a  work  dispatcher  has  every  machine  in  the 
shop  displayed  before  him  on  a  board,  with  its  jobs  in  hand 
or  accumulated  systematically  tabulated  on  slips,  and  he  di- 
rects the  next  movement  for  each  man  and  machine  on  the 
floor,  as  a  train  dispatcher  moves  the  trains  on  a  railroad. 

The  individual  jobs  are  usually  designated  by  numbers 
connecting  them  with  the  work  to  which  they  apply.  The 
time  each  man  works  is  usually  recorded  by  a  representative 
of  the  accounting  or  auditing  or  cost  department,  called  a 
time  clerk  or  a  timekeeper.  Very  generally  each  workman 
registers  his  entrance  and  departure  by  punching  a  time 
clock  or  some  similar  automatic  recording  device,  so  that 
the  total  time  for  which  he  is  paid  is  indisputable.  The 
division  of  his  time  among  various  jobs  (if  his  work  is  of 
such  character  that  it  is  divided  among  several  jobs)  is 
noted  either  by  himself,  by  his  foreman,  or  by  the  time 
clerk,  who  then  makes  frequent  rounds  of  the  shop  and 
visits  every  man  often  enough  to  keep  close  track.  These 
time  records,  like  the  material  records,  are  usually  kept  on 
individual  cards,  which  can  be  assembled  afterwards  for 
such  tabulations  and  cost  determinations  as  are  desired  and 
may  be  kept  as  long  as  deemed  advisable  for  further  ref- 
erence. The  system  of  payment  is  determined  by  the  man- 
agement in  the  light  of  such  appreciation  as  the  managers 
may  have  of  the  virtue  and  benefits  of  the  several  advanced 
wage  systems,  and  under  such  limitations  as  the  prejudices 
of  the  men  or  the  effective  restriction  of  the  union  may  re- 
quire. 


54  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

The  fourth  cardinal  point  listed  for  systematic  direction 
was  the  care  and  maintenance  of  tools  and  machinery.  The 
larger  mechanical  equipment,  power  transmission,  etc.,  is  too 
often  left  more  or  less  vaguely  to  the  engineering  or  me- 
chanical department,  from  whom  it  devolves  upon  the  fore- 
men. There  is,  however,  a  generally  recognized  and  almost 
universally  established  institution  called  the  tool  room, 
which  has  two  separate  functions;  one  is  the  custody  and 
issue  of  small  tools,  which  are  provided,  ground,  kept  in 
order,  and  given  out  to  the  men  as  needed,  account  being 
kept  by  hanging  a  brass  check  representing  the  tool  on  a 
hook  bearing  the  workman's  number.  The  other  and 
larger  function 'of  the  tool  room  is  the  making  of  standard 
and  special  tools,  jigs,  fixtures,  etc.,  and  the  repair  of  ma- 
chines and  machinery.  The  province  of  the  tool  room, 
however,  is  seldom  extended  widely  enough  and  the  tool- 
maker's  knowledge  of  the  most  efficient  operation  of  ma- 
chines and  of  the  principal  causes  of  waste  and  loss  of  time 
is  seldom  deep  enough,  or  his  authority  to  institute  re- 
forms and  is  seldom  great  enough,  to  make  the  tool  room 
adequate  to  drive  the  plant  at  its  highest  capacity.  Here 
is  an  opportunity  for  most  profitable  use  of  the  staff  spe- 
cialist. 

The  direction  of  methods,  our  fifth  cardinal  point,  is  in  a 
still  more  unsatisfactory  condition.  It  is  left  sometimes  to 
the  men  running  the  machines,  sometimes  to  their  foreman 
or  to  a  special  functional  foreman,  sometimes  to  the  tool 
room,  sometimes  to  the  drafting  room,  and  sometimes  to 
the  engineering  department  or  mechanical  department  at 
large.  Here  is  another  broad  field  for  the  staff  specialist. 

Systematic  supervision  of  money  matters,  our  sixth  car- 
dinal point  in  manufacturing  organization,  exists  in  two  di- 
rections. Both  are  based,  in  part  at  least,  on  the  same  data, 
but  their  scope  and  purpose  are  quite  diverse.  The  first  of 
these  functions  is  exercised  by  the  auditor's  department.  Its 


PRINCIPLES    OF    INDUSTRIAL    ORGANIZATION  55 

purpose  is  simply  to  connect  every  expenditure  with  an  ac- 
tual bona  fide  transaction  —  material  bought  and  vouched 
for,  wages  paid  for  services  proved,  royalties  paid  on  a  veri- 
fied contract,  machines  purchased,  buildings  erected,  etc. 
Time  and  material  tickets  coming  from  the  shop  are  merely 
vouchers  to  the  auditor,  to  warrant  his  O.  K.  of  requisitions 
on  the  treasurer  for  the  payment  of  bills  or  the  drawing  of 
payroll  checks.  Beyond  this,  he  is  not  in  the  least  concerned 
officially.  If  John  Smith  is  certified  on  the  payroll  for  60 
hours,  as  proved  by  the  time  clock,  and  at  25  cents  an  hour 
as  certified  by  his  general  foreman,  the  auditor  approves 
his  payroll  check  for  $15  without  further  question. 

But  the  second  department  concerned  in  money  matters 
has  a  different  function;  this  is  the  cost  department.  The 
time  and  material  cards,  having  served  as  auditor's  vouch- 
ers if  necessary,  are  taken  in  hand  by  the  cost  department 
and  sorted  by  numbers  so  that  all  cards  belonging  to  any 
particular  job,  machine,  or  desired  item  of  product  fall  to- 
gether. From  these  the  complete  material  and  labor  cost 
of  any  piece  or  product  (or  by  proper  prearrangement,  of 
any  part  of  a  unit  of  product  or  of  any  operation  upon  any 
part)  can  be  figured  up  and  recorded.  It  is  part  of  the 
function  of  the  cost  department  not  merely  to  connect  ex- 
penditures with  certain  manufacturing  accounts  as  the  audi- 
tor does,  but  to  determine  by  comparison  whether  the  ex- 
penditure and  the  thing  secured  by  it  are  in  fair  proportion. 
The  auditor  went  no  farther  than  to  find  that  John  Smith 
put  in  60  hours  by  the  clock.  The  cost  department  divides 
up  this  60  hours,  job  by  job,  and  it  can  or  should  compare 
John  Smith's  time  on  each  job  with  recorded  times  made  by 
other  men  on  the  same  jobs.  If  he  has  been  soldiering  and 
has  done  altogether  in  60  hours  only  what  the  records  show 
that  other  men  have  previously  done  in  25  hours,  the  facts 
are  made  clear  and  proper  action  can  be  taken. 

The  cost  department,  properly  conducted,  may  thus  be- 


56  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

come  a  mine  of  valuable  information,  first  for  the  shop 
superintendent  in  helping  him  to  prove  the  comparative 
worth  of  his  men,  and  next  for  the  commercial  or  sales  or- 
ganization, because  it  shows  not  only  what  margin  of  profit 
exists  and  affords  a  guide  to  possibilities  of  meeting  compe- 
tition, but  it  also  permits  close  estimates  to  be  made  on  new 
work,  by  a  comparison  with  similar  jobs  in  the  past  and  by 
compiling  unit  prices  from  which  the  costs  of  new  models 
may  be  built  up. 


FORMS  OF  INDUSTRIAL  OWNERSHIP 


CHAPTER  IV 

FORMS  OF  INDUSTRIAL  OWNERSHIP 

PURSUIT  of  a  systematic  inquiry  into  the  science,  princi- 
ples and  institutions  by  which  manufacturing  operations 
are  carried  on  leads  from  the  general  to  the  specific.  It  is 
therefore  proper  to  supplement  the  examination  of  organ- 
ization at  large  by  a  short  survey  of  the  forms  of  organiza- 
tion legally  established  for  the  conduct  of  industrial  opera- 
tions. These  are  few  and  highly  specific.  For  while  the 
internal  regulation  of  industrial  concerns,  being  governed  by 
individual  freedom,  is  (as  we  have  seen)  far  from  stand- 
ardization, their  external  relations  have  been  very  exactly 
fixed  by  law.  Society,  in  its  general  care  for  the  rights  of 
the  individual  and  of  property,  has  prescribed  certain  def- 
inite forms  of  ownership  by  which  the  manufacturing  plant 
may  be  held  and  operated. 

The  first  and  simplest  of  course  is  possession  and  oper- 
ation by  the  individual  owner.  It  is  scarcely  necessary  to 
comment  upon  so  familiar  an  institution  as  single  propri- 
etorship. The  condition  is  one  that  has  probably  come  un- 
der the  personal  observation  and  experience  of  all  of  us,  and 
if  we  magnify  the  cobbler's  bench  up  to  the  huge  shoe  fac- 
tory, or  the  little  jobbing  foundry  up  to  the  gigantic  iron 
works,  the  legal  position  of  the  individual  proprietor  is 
substantially  unchanged.  He  may  hire  such  assistance  as  he 
desires,  delegate  to  employees  such  of  his  powers  or  func- 
tions as  he  sees  fit,  carry  on  the  most  diverse  occupations  if 
he  think  best.  His  credit  is  such  as  he  may  establish  by 
his  character  and  property  qualifications.  His  liability  ex- 
tends to  all  that  he  has,  subject  only  to  the  ordinary  legal 

59 


60  PRINCIPLES    OF    INDUSTRIAL   ENGINEERING 

exemptions,  to  which  all  men  are  entitled.  In  short,  he  has 
all  the  authority,  all  the  profits,  and  all  the  responsibility, 
and  he  carries  on  business  as  he  sees  fit,  subject  only  to  the 
general  law  of  the  land. 

One  qualification  of  the  individual  freedom  to  carry  on 
an  individual  proprietorship  without  public  notice  or  legal 
restraint  should,  however,  be  noted.  If  a  man  elects  to 
operate  not  under  his  own  name,  but  under  such  style  as 
the  Elite  Foundry  or  the  Vacuum  Process  Co.  or  the  Ex- 
celsior Machine  Shop,  although  in  fact  he  is  sole  owner  and 
proprietor,  he  must  file  in  a  designated  public  office  (in 
New  York  State,  the  office  of  the  county  clerk)  a  state- 
ment setting  forth  who  is  actually  carrying  on  the  business 
and  all  necessary  information  to  advise  the  public  duly  of 
the  facts  and  the  person  responsible  for  the  acts,  obligations 
and  debts  of  the  business. 

There  is  no  necessary  limit  to  the  size  of  the  business  that 
may  be  conducted  individually.  The  Krupp  works  were 
so  carried  to  a  foremost  position  in  the  iron  and  steel  in- 
dustry of  the  world;  and  I  believe  they  are  yet  (or  at  least 
they  were  quite  recently)  under  individual  sole  ownership, 
though  the  actual  management  had  been  turned  over 
largely  to  a  Direktorium  of  twelve  members. 

For  reasons  of  convenience  or  finance,  however,  it  often 
becomes  expedient  for  an  owner  to  divide  his  duties,  profits 
and  responsibilities  with  one  or  several  others,  who  become 
joint  owners  with  him,  in  equal  or  unequal  proportion  as  the 
special  arrangements  may  determine.  In  the  case  of  a  new 
business  several  men  may  thus  associate  themselves  in  joint 
ownership  at  the  outset,  each  contributing  his  share  of 
money  and  his  particular  talents  and  work  to  the  prosecu- 
tion of  the  business.  In  the  case  of  a  business  which  has 
been  running  as  a  sole  proprietorship,  the  original  owner 
may  want  to  attach  an  important  employee  permanently  to 
the  business  by  giving  him  a  share  in  the  results,  rather  than 


FORMS   OF    INDUSTRIAL   OWNERSHIP  6 1 

a  mere  salary  independent  of  the  results.  He  may  want  to 
bring  in  more  capital  without  borrowing  against  his  own 
credit.  Or  he  may  want  to  bring  in  some  special  knowl- 
edge or  skill  or  some  trade  connection  possessed  by  some 
special  individual.  In  either  case,  or  for  whatever  motive, 
we  have  as  the  result  a  second  form  of  industrial  unit,  no 
longer  single,  but  compound;  this  is  the  partnership  or  joint 
partnership  or  firm,  as  it  is  variously  called. 

A  partnership  is  a  group  of  individuals  (usually  a  small 
group)  who  have  joined  their  property,  services,  and  credit, 
for  the  purposes  of  conducting  business  for  their  joint  ben- 
efit This  relation  is  established  by  agreement  between 
themselves,  but  it  is  subject  to  certain  regulations  or  limita- 
tions or  definitions,  both  under  the  old  common  law  and  by 
statute.  These  statutory  provisions  concern  both  the  rela- 
tions of  individual  partners  to  one  another,  and  relations  of 
the  entire  partnership  to  outside  individuals  or  to  the  public 
at  large.  You  can  readily  see  how  the  creation  and  use  of 
the  partnership  as  an  industrial  institution  would  necessarily 
give  rise  to  a  body  of  partnership  law.  Smith,  Jones  and 
Robinson,  doing  business  as  a  partnership,  owning  certain 
property,  machinery  and  materials  in  the  firm  name,  mak- 
ing a  contract  with  you  to  employ  your  services  as  superin- 
tendent, or  to  buy  from  you  a  steam  engine  which  you  are  to 
build  on  their  order,  are,  plainly  enough,  a  distinct  entity, 
separate  and  different  from  either  Smith,  or  Jones,  or  Rob- 
inson individually.  If  John  Smith  individually  contracts 
with  you  to  do  or  supply  some  thing,  you  know  that  you 
are  to  look  to  him  personally  for  performance  of  that  con- 
tract and  that  he  can  be  held  financially  responsible  to  the 
extent  of  his  entire  property  for  faithful  performance.  But 
suppose  Smith,  as  a  member  of  the  firm  Smith,  Jones  and 
Robinson,  makes  a  similar  contract;  has  he  divested  him- 
self of  two-thirds  of  his  responsibility  by  taking  in  these 
two  partners?  Or  if  the  contract  is  not  carried  out  and  it 


62  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

proves  that  Smith,  after  all,  has  no  property  from  which 
you  can  recover  damages  for  the  non-performance,  can  you 
take  Jones's  house  or  Robinson's  bank  deposit  to  make  you 
whole  in  a  negotiation  which  was  originally  begun  with 
Smith? 

These  and  other  questions  of  the  rights  and  duties  of 
joint  partnership  are  settled  by  rules  of  law  or  by  statutes 
which  vary  somewhat  in  different  countries  and  states.  In 
general,  however,  a  partnership,  and  each  and  every  partner 
in  that  partnership,  is  bound  by  the  act  of  any  member  of 
the  partnership  done  in  the  name  of  the  firm  and  within  the 
scope  of  his  apparent  authority.  In  other  words,  each  part- 
ner is  a  general  agent  of  the  firm,  with  full  authority  to  do 
any  and  every  act  necessary  to  the  transaction  of  the  firm's 
business.  Each  partner,  also,  is  liable  for  all  contract  obli- 
gations of  the  firm,  whether  incurred  by  himself  or  some 
other  partner,  and  each  partner  is  liable  for  wrongful  acts 
committed  by  one  or  more  of  his  fellow  partners  within  the 
scope  of  their  apparent  authority. 

For  instance,  suppose  Smith,  Jones  and  Robinson  are  a 
firm  of  iron  founders,  and  Smith,  driving  a  truck  load  of 
castings  for  delivery  to  a  customer,  negligently  runs  over  a 
pedestrian  in  the  street  and  injures  him,  or  negligently  runs 
into  another  wagon  and  overturns  it,  giving  rise  to  dam- 
ages. The  firm  will  be  liable  for  these  damages,  and  if  the 
firm's  property  were  insufficient  to  pay  the  amount  awarded, 
Jones's  personal  property  or  Robinson's  might  be  attached 
to  pay  the  judgment  for  the  act  done  by  Smith.  This  is  an 
instance  of  a  wrongful  act  committed  within  the  scope  of 
Smith's  apparent  authority  as  a  member  of  the  firm.  If  he 
got  down  from  his  truck  and  beat  a  man  on  the  sidewalk, 
the  firm  as  a  firm  or  the  other  persons  individually  would 
not  be  liable,  because  the  act,  although  wrongful  enough, 
is  not  within  the  scope  of  his  apparent  authority. 

To  a  certain  extent,  therefore,  the  law  makes  a  partner- 


FORMS    OF    INDUSTRIAL    OWNERSHIP  63 

ship  an  artificial  person.  In  the  case  of  liability  for  acci- 
dents the  firm's  property  must  be  exhausted  before  the  per- 
sonal property  of  its  component  members  is  taken.  But 
when  the  limit  of  the  firm's  property  is  reached,  the  persons 
are  each  accountable  for  debts  and  acts  of  the  firm  as  if 
these  debts  and  acts  were  their  own  personally. 

There  is,  however,  an  exception  to  be  noted  in  the  case 
of  special  partnerships.  A  man  may  enter  a  firm  as  special 
partner  to  the  extent  of  a  fixed  amount  of  capital  and  with 
the  limitation  of  his  liability  to  this  amount  of  capital  ac- 
tually contributed;  but  this  is  permitted  by  statute  only  on 
condition  that  the  special  partner's  stated  contribution  is 
actually  all  paid  in  cash ;  and  furthermore  in  such  cases  a 
certificate  must  be  duly  filed  with  the  proper  public  official 
setting  forth  who  are  the  general  and  who  are  the  special 
partners,  with  the  amounts  contributed  by  each  of  the  spe- 
cial partners,  and  an  affidavit  that  these  amounts  have  ac- 
tually been  fully  paid  in.  They  must  also  advertise  in  the 
county  in  which  their  chief  place  of  business  is  located, 
specifying  the  general  and  special  partners  and  the  amounts 
contributed  by  each,  and  giving  a  copy  of  the  affidavit  and 
the  articles  of  agreement.  Furthermore,  no  firm  can  be 
composed  of  special  partners  only.  There  must  be  at  least 
one  general  partner  whose  liability  is  unlimited. 

To  the  largest  possible  extent,  however,  the  law  leaves 
a  partnership  as  free  as  an  individual  in  the  transaction  of 
business,  with  no  restrictions  as  to  the  number  and  kinds  of 
legitimate  business  a  single  partnership  may  carry  on.  This, 
as  we  shall  see,  is  in  contradistinction  to  the  last  form  of 
business  organization  we  are  to  consider,  the  corporation  or 
stock  company,  which  is  altogether  an  artificial  person,  op- 
erating with  such  powers  only,  with  such  scope  only,  and 
under  such  conditions  only,  as  are  expressly  stipulated  by 
the  statutes  permitting  it  to  exist. 

Before  taking  up  the  corporation,  there  is  one  other  but 


64  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

relatively  unimportant  form  of  business  organization  to  be 
noted. 

A  joint-stock  association  is  formed  by  agreement  among 
its  members,  requiring  no  charter  and  no  publication  of  the 
articles.  The  capital  is  divided  into  shares,  as  in  a  corpo- 
ration, and  the  shares  are  freely  transferable.  It  may  sue 
and  be  sued  by  its  president  and  treasurer,  and  its  directors 
are  personally  liable  for  its  obligations  after  the  property 
of  the  association  is  exhausted.  It  exists  by  recognition  of 
statute. 

A  corporation  is  a  wholly  artificial  person.  It  is  recog- 
nized by  law  and  created  in  accordance  with  the  legal  reg- 
ulation for  carrying  on  undertakings  of  various  kinds,  public 
or  private,  eleemosynary  or  commercial,  financial  or  trans- 
portation. We  are  concerned  only  with  commercial  or  in- 
dustrial corporations.  As  the  corporation  exists  by  pro- 
vision of  law,  it  has  only  such  powers,  rights,  and  privileges 
as  are  expressly  conferred  by  law.  It  has  not  the  natural 
and  inherent  rights  possessed  by  an  individual.  This  is  one 
of  the  principal  distinctions  between  the  position  and  con- 
duct of  the  corporation  and  that  of  an  individual  proprie- 
torship or  firm.  Smith,  Jones  and  Robinson  may  start  up 
in  business  as  a  firm  without  notice  to  anybody,  if  they  so 
please,  and  do  any  and  every  kind  of  lawful  business  they 
may  elect  to  carry  on.  Excepting  in  the  particular  case  of 
a  special  partnership  already  referred  to,  no  declaration  of 
their  agreement,  nor  of  their  money  matters,  is  required  nor 
need  they  declare  their  respective  functions  in  the  business. 
They  may  think  it  expedient  to  make  a  statement  of  their 
finances  or  of  other  details  to  their  bankers,  or  to  those 
from  whom  they  wish  to  buy  on  credit,  but  it  is  a  voluntary 
and  private  communication.  If,  however,  they  decide  to  in- 
corporate as  the  Smith,  Jones  and  Robinson  Co.  they  must 
file  articles  of  incorporation  with  the  secretary  of  State 
and  with  the  county  clerk  in  the  county  where  their  prin- 


FORMS    OF    INDUSTRIAL    OWNERSHIP  65 

cipal  office  is  situated,  declaring  their  purpose,  defining  the 
kind  of  business  they  propose  to  carry  on,  and  the  amount 
of  capital  with  which  they  propose  to  operate.  They  must 
secure  from  the  secretary  of  State  a  charter  authorizing  them 
to  carry  on  business;  and  while  the  charters  of  large  corpo- 
rations especially  are  often  very  broad,  a  corporation  is  not 
in  general  permitted  to  do  any  kind  of  business  not  fairly 
included  in  the  charter  provisions;  for  example  a  company 
incorporated  for  manufacturing  may  not  generally  engage 
in  banking,  nor  may  a  railroad  company  engage  in  mining. 

The  case  of  the  "  Coal  Roads  "  illustrative  of  this  point 
is  fresh  in  mind.  The  charter  of  the  U.  S.  Steel  Corpora- 
tion is  very  broad,  but  very  probably  it  could  not  legally  en- 
gage in  the  theatrical  business  in  Pittsburg.  Corporations 
must  state  in  their  articles  of  incorporation  the  capital  (that 
is,  the  amount  of  money  value)  which  they  profess  to  devote 
to  the  purposes  of  their  business,  and  they  must  pay  an  in- 
corporation tax  and  a  tax  annually  thereafter  on  this  cap- 
italization. This  capital,  however,  is  often  nominal,  and 
there  is  no  general  legal  requirement  nor  provision  for  pub- 
lic inquiry  into  the  equivalence  of  the  capital  declared  and 
the  value  of  the  property  and  funds  actually  possessed  by  the 
corporation,  although  New  York  State  subscriptions  to  capital 
stock  must  be  paid  in  cash  or  in  property  at  a  fair  valuation. 
That  is  a  matter  in  which  the  investor  who  is  putting  funds 
into  the  corporation  must  determine  for  himself.  The  mar- 
ket value  of  the  stock  of  any  going  corporation  usually  ex- 
presses the  public  estimate  of  its  actual  worth.  There  is, 
however,  a  tendency  of  late  (as  part  of  the  movement  to 
exercise  larger  governmental  control  of  corporations)  to 
provide  for  some  official  physical  valuation,  especially  of  the 
property  of  railroad  corporations,  with  a  view  to  larger 
protection  of  investors  against  the  deceptions  of  promoters  or 
of  manipulators. 

In  financial  make-up  the  firm  and  the  corporation  differ 


66  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

thus :  The  proportions  in  which  the  members  of  a  firm 
share  in  the  ownership  and  the  results  of  business  are  fixed 
by  agreement  among  themselves.  As  a  general  proposition, 
no  new  member  may  be  admitted  to  a  firm,  no  member  may 
retire,  no  member  may  transfer  to  another  person  all  or 
any  part  of  his  interest,  without  the  consent  of  all  the  other 
members  of  the  firm  or  without  adjustment  of  the  debits  or 
credits  of  the  firm  to  date  of  change.  In  a  corporation  the 
total  capitalization  is  divided  into  a  fixed  number  of  shares. 
Each  of  these  shares  has  a  definite  par  value  —  usually 
$100,  though  some  large  industrial  companies  have  shares 
of  a  par  value  of  $50  and  many  mining  corporations  divide 
their  stock  into  shares  of  a  par  value  of  $10,  $5  or  even  $i. 

These  shares  are  commonly  sold  in  the  first  instance  by 
public  subscription  or  given  in  exchange  for  properties, 
patents,  etc.,  and  thereafter  are  transferable  without  restric- 
tion, passing  from  hand  to  hand  in  the  open  market,  pur- 
chasable by  anybody  in  any  quantity  that  market  condi- 
tions permit.  In  the  case  of  the  large  corporations  listed 
on  the  exchanges,  the  stock  is  traded  in  to  the  extent  of 
thousands,  tens  of  thousands,  and  even  hundreds  of  thou- 
sands of  shares  a  day.  Each  transfer  is  recorded  if  de- 
sired by  the  buyer  on  the  books  of  the  corporation.  The 
buyer  brings  in  the  old  certificate  endorsed  by  the  former 
owner,  with  proper  witnessing  signatures,  and  receives  in 
exchange  a  new  certificate  issued  in  his  own  name.  The 
corporation  recognizes  as  voting  members  those  stockholders 
whose  names  are  registered  on  its  stock  ledgers  at  any  given 
time,  and  the  voting  power  of  each  shareholder  is  measured 
by  his  stock  holdings.  Thus  the  membership  in  a  corporation 
may  be  and  usually  is  constantly  shifting,  both  as  to  persons 
and  proportion  held  by  each. 

There  is  another  very  important  financial  difference  be- 
tween a  corporation  and  a  firm.  In  a  firm,  as  we  have  al- 
ready seen,  each  member  (except  a  special  member)  is  like 


FORMS    OF    INDUSTRIAL    OWNERSHIP  67 

an  individual  proprietor  in  that  he  is  liable  to  the  extent  of 
his  entire  possessions  for  the  liabilities  of  the  firm.  Now  a 
stockholder  in  a  corporation  is  not  usually  liable,  either  for 
its  debts  or  its  wrongful  acts,  beyond  the  amount  of  his 
stock.  That  stock  may  become  valueless  because  all  the 
property  of  the  corporation  is  exhausted,  and  so  the  stock- 
holder may  lose  what  he  has  put  in;  but  the  creditors  or  the 
holders  of  a  judgment  against  a  corporation  can  not  go  be- 
yond the  property  of  that  corporation  and  attach  property 
of  the  individual  stockholder.  In  former  times,  under  the 
old  law  of  corporations,  a  creditor  could  do  so,  and  in  one 
famous  case  in  Scotland,  the  case  of  a  bank,  if  I  remember 
rightly,  every  stockholder,  no  matter  how  small  his  holding, 
was  ruined  by  the  failure  of  the  bank,  the  successive  assess- 
ments to  meet  the  debts  of  the  corporation  exhausting  finally 
the  last  shilling  of  the  last  man.  In  some  places  and  in 
some  kinds  of  corporations  there  still  exists  what  is  called 
"  double  liability."  That  is,  each  stockholder  may  not 
only  lose  originally  what  he  put  in,  but  he  may  be  com- 
pelled to  pay  in  addition  an  amount  equal  to  the  ^par  value 
of  his  stock  holdings  if  this  is  necessary  to  meet  the  obliga- 
tions of  the  company.  This  is  the  case  with  all  national 
banks,  but  with  manufacturing  corporations  it  is  exceptional 
and  as  a  general  proposition  there  is  no  liability  and  no  as- 
sessment collectible  beyond  the  single  value  of  the  stock 
each  member  of  the  corporation  holds. 

The  management  of  a  corporation  is  vested  in  a  board 
of  directors  elected  annually  by  the  stockholders.  These 
directors  in  turn  elect  the  officers  of  the  company  and  ap- 
point its  chief  officials.  The  law  requires  that  there  shall  be 
certain  specified  officers,  in  New  York  a  president,  a  secre- 
tary, and  a  treasurer.  Other  officers  may  be  added  if  de- 
sired. Very  frequently  in  large  corporations  there  are  sev- 
eral vice-presidents,  each  heading  one  of  the  principal  di- 
visions of  the  corporation's  work.  One,  for  example,  may 


68  PRINCIPLES   OF    INDUSTRIAL    ENGINEERING 

be  a  financial  man  and  look  after  marketing  of  bonds  or  notes, 
loans,  and  banking  and  financial  affairs  generally;  another 
may  direct  the  commercial  or  sales  department;  a  third  may 
be  a  technical  man  in  charge  of  manufacturing  or  produc- 
tion; a  fourth  may  be  a  lawyer  and  control  the  legal  work, 
the  drawing  of  contracts,  patents,  etc.  The  general  man- 
ager, who  is  the  active  executive  official  in  direct  charge  of 
the  principal  activities  of  the  corporation,  is  very  often,  per- 
haps generally,  not  a  director,  although  in  many  cases  the 
president  or  vice-president  is  also  general.manager. 

Directors  are  elected  for  a  term  of  one  year  by  a  majority 
vote  of  all  the  stock  represented  at  the  meeting.  A  single 
share  may  thus  determine  the  control  of  a  large  corpora- 
tion. In  our  larger  and  better  companies,  however,  it  is 
generally  conceded  as  a  moral  right  that  a  large  unified 
minority  interest  shall  have  representation  on  the  board  of 
directors.  If  "  cumulative  voting  "  is  provided  for  in  the 
constitution  of  the  company,  a  respectable  minority  may  be- 
come actually  able  to  elect  a  director,  irrespective  of  any 
moral  right  to  representation.  The  amount  of  freedom 
given  to  individual  officers  or  officials  (freedom,  that  is,  to 
act  without  prior  approval  by  the  directors)  naturally  varies 
greatly  with  the  circumstances.  Very  generally,  an  exec- 
utive committee  of  limited  membership,  easily  got  together 
for  consultation  by  the  general  manager,  has  plenary  powers 
and  decides  even  very  important  matters  without  calling  to- 
gether the  full  board,  merely  reporting  its  action  for  con- 
firmation at  a  later  regular  meeting.  But  in  an  issue,  the 
majority  vote  of  the  board  of  directors  decides.  You  often 
see,  therefore,  a  struggle  for  control  of  a  large  company 
thrown  into  the  stock  market,  both  sides  striving  to  buy  up 
floating  stock  so  as  to  control  votes  in  the  election  of  a  board 
of  directors  who  will  carry  out  their  policies. 

There  is  an  old  saying  that  a  corporation  never  dies. 
Even  a  corporation  may  be  extinguished  under  proper  legal 


FORMS    OF    INDUSTRIAL    OWNERSHIP  69 

procedure  by  settling  all  its  obligations,  dividing  its  assets 
pro  rata,  and  surrendering  its  charter.  But  a  corporation  is 
not  affected  as  to  continuity  by  the  death  of  any  individual. 
It  is  immaterial  to  its  mere  existence  who  owns  any  part  of 
its  stock.  An  individual  proprietorship  or  firm,  on  the 
other  hand,  may  be  very  seriously  embarrassed  and  even 
unwillingly  forced  to  wind  up  by  the  death  of  a  sole  owner 
in  one  case  or  of  a  partner  in  the  other.  Some  difficulty  or 
embarrassment  in  administering  the  estate  of  the  deceased, 
some  quarrel  among  the  heirs  —  if  no  one  interest  is  strong 
enough  to  buy  out  all  the  others,  may  leave  no  alternative 
except  to  close  out  the  business.  But  as  the  corporation  is  an 
artificial  entity,  wholly  independent  of  any  of  its  component 
members,  it  goes  on  unaffected. 

For  this  reason,  as  well  as  on  account  of  the  limitation  of 
liability  already  spoken  of,  a  corporation  is  strongly  favored 
even  for  businesses  which  are  essentially  proprietary.  A 
man  may  make  a  stock  company  of  his  own  business,  dis- 
tributing just  enough  shares  to  secure  the  legal  number  of 
stockholders,  and  electing  officers  from  members  of  his  own 
family  or  entirely  trustworthy  friends,  and  thus  may  give  his 
business  a  form  in  which  it  may  be  perpetuated  without  dan- 
ger of  immediate  collapse  at  his  death.  For  this  and  other 
reasons  industrial  undertakings  in  the  United  States  tend 
more  and  more  to  be  conducted  under  the  form  of  an  in- 
corporated company. 

The  money  paid  in  by  the  stockholders  when  the  com- 
pany is  first  organized  is  its  capital  stock  or  capital.  This 
is  used  to  provide  (or,  as  already  noted,  it  may  in  part  al- 
ready have  the  form  of)  buildings,  machinery,  patents,  and 
equipment.  That  part  of  the  capital  which  is  not  perma- 
nently crystallized  in  these  fixed  forms  —  that  part  which 
remains  in  "  liquid  "  form  —  is  called  the  working  capital, 
in  centra-distinction  to  the  other  or  fixed  capital.  As  earn- 
ings or  profits  begin  to  come  in  and  accumulate,  the  total 


70  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

value  of  all  the  assets  of  the  company  becomes  something 
more  than  the  original  capital.  This  excess  value  is  called 
surplus.  From  time  to  time,  if  the  directors  think  wise,  a 
portion  of  the  accumulated  earnings  is  distributed  pro  rata 
among  the  stockholders,  profits  so  distributed  being  known 
as  dividends. 

That  portion  of  the  property  of  a  corporation  which  con- 
sists of  money  or  things  which  can  readily  be  converted  into 
money,  such  as  good  accounts  due  the  company,  bills  receiv- 
able, marketable  securities  belonging  to  other  corporations, 
or  perhaps  even  readily  salable  merchandise,  is  called  the 
"  quick  assets  "  of  the  company;  while  that  portion  consist- 
ing of  buildings,  machinery  and  equipment  installed,  patent 
rights,  etc.,  which  can  not  readily  be  turned  into  cash,  is 
called  the  fixed  assets  of  the  company.  This  is  a  classifica- 
tion which  has  nothing  to  do  with  capital  and  surplus.  A 
large  part  of  the  capital  of  the  company  might  be  in  the  form 
of  quick  assets,  while  conversely  all  its  surplus  might  have 
gone  into  a  form  in  which  it  can  not  be  converted  into  money 
at  all,  as,  for  instance,  in  the  case  of  a  telegraph  company 
which  constantly  put  a  part  of  its  surplus  into  extending  its 
lines. 

A  corporation  may  usually  buy,  own  and  hold  the  stock 
of  another  corporation  just  as  an  individual  might  own  it. 
But  in  the  case  of  railroads,  this  right  has  of  late  been  con- 
siderably limited  and  abridged  by  statute.  For  conven- 
ience, to  segregate  its  activities,  or  to  avoid  overstepping  its 
charter,  a  large  corporation  will  often  organize  a  subsidiary 
corporation  to  carry  on  some  contributing  industry.  A  steel 
company  might  thus  organize  a  subsidiary  transportation 
company  to  haul  its  ore  or  products,  or  a  subsidiary  mining 
company  to  produce  the  ore,  or  a  subsidiary  tin  plate  or  wire 
mill  to  work  up  its  products.  The  parent  company  might 
then  own  all  the  stock  of  the  subsidiary,  appoint  all  its  di- 


FORMS    OF    INDUSTRIAL    OWNERSHIP  71 

rectors,  and  receive  all  its  dividends,  which  would  then  go 
to  swell  the  profits  of  the  parent  concern.  Or  it  might  sell 
part  of  the  stock  of  the  subsidiary  companies  in  open  mar- 
ket, retaining  only  a  majority  control. 

There  are  many  other  applications  of  corporation  law 
such  as  the  organization  of  a  holding  company,  or  a  con- 
struction company,  which  are  of  high  ingenuity,  but  too 
frequently  of  very  low  morality.  Many  of  them  are  de- 
signed to  evade  the  intended  limitations  of  corporate  powers, 
or  perhaps  to  segregate  all  the  assets  in  the  unassailable  pos- 
session of  one  corporation,  while  all  the  liabilities  are  in- 
curred by  another.  These  devices  are  not  creditable  to 
American  finance,  and  the  evils  they  have  created,  the 
abuses  to  which  they  have  given  rise,  are  the  prime  cause  of 
the  public  hostility  toward  corporations  which  is  causing  the 
present  industrial  disturbance  and  preventing  a  full  meas- 
ure of  industrial  prosperity.  Such  legal  and  financial 
legerdemain  has  no  place  in  our  consideration.  We  are  con- 
cerned only  with  a  brief  general  outline  of  the  principal  in- 
stitutions by  which  industrial  operations  are  carried  on;  and 
having  now  broadly  sketched  such  an  outline,  we  will  pro- 
ceed to  an  equally  rapid  survey  of  the  methods  generally 
followed  in  the  particular  department  in  which  we  are  spe- 
cially interested  —  the  manufacturing  or  production  de- 
partment of  a  large  organization.  That  is,  we  will  resur- 
vey  the  operations  of  organized  manufacturing,  not  sci- 
entifically dissected  and  disconnected  as  in  the  foregoing 
chapter,  but  in  actual  operation. 

The  fundamental  proposition  is  that  nothing  shall  be 
made  —  no  order  to  manufacture  shall  be  given  out  — 
without  authority  of  some  duly  authorized  and  responsible 
official.  Whether  the  article  to  be  manufactured  is  special, 
from  special  or  original  plans,  or  whether  it  is  a  stock  article 
made  by  standard  patterns,  someone  in  authority  "  vivifies," 


72  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

by  his  signature,  the  order  that  starts  the  process  of  manu- 
facture. Such  an  order  to  manufacture  an  article  or  a  lot 
of  articles  is  usually  called  a  production  order. 

The  production  order  is  general.  It  may  call  for  (say) 
"  20,  No.  2  milling  machines,"  or  "  10  Eclipse  engines, 
8x12  "  or  "  100  type  C,  10  k.w.  d.  c.  motors."  Every  pro- 
duction order  is  therefore  likely  to  involve  several  or  many 
different  items  or  acts  of  production.  The  production  order 
is  therefore  first  sent  to  the  engineering  or  drafting  depart- 
ment and  is  there  reduced  to  these  specific  elements, 
although,  in  the  case  of  strictly  standard  products,  standard- 
ized lists  of  details  may  be  filed  in  the  production  depart- 
ment and  may  be  taken  off  as  a  matter  of  routine.  In  either 
case,  the  production  order  next  appears  as  an  itemized  list 
of  materials  and  jobs,  immediately  understandable  by  the 
shop  officials.  The  superintendent  of  the  shop  or  depart- 
ment or  his  duly  authorized  subordinates  then  secure  the 
materials  needed,  by  a  requisition  upon  another  department 
which  has  custody  of  all  materials.  This  department  is 
called  the  stores  department.  The  materials  being  secured, 
the  various  jobs  of  work  upon  them  are  then  given  out  to 
individual  workmen,  sometimes  by  a  central  work-dispatch- 
ing office,  sometimes  by  the  foremen  of  the  various  depart- 
ments. These  separate  orders  to  do  specific  parts  of  the 
work  are  generally  called  works  orders  or  job  tickets.  Each 
job  ticket,  for  convenience  in  accounting  with  the  men,  has 
its  own  serial  number;  but  each  job  ticket  carries  in  addi- 
tion the  number  of  the  general  production  order  to  which 
it  belongs. 

Each  work  order  or  job  when  finished  is  delivered  to  the 
finished-stores  department,  or  to  the  assembling  or  erecting 
department  by  which  it  is  in  turn  delivered  to  the  finished 
stores.  Notice  of  the  completion  of  the  entire  production 
order,  or  of  each  installment  of  it  until  it  is  complete,  is 
returned  by  this  finished-stores  department  to  the  office  from 


FORMS    OF    INDUSTRIAL   OWNERSHIP  73 

which  the  production  order  originated  —  and  the  cycle  is 
thus  completed. 

The  original  production-order  number  appearing  on  the 
ticket  or  instruction  card  accompanying  each  job  passing 
through  the  shop  serves  to  identify  it  and  direct  it  surely  to 
the  intended  destination,  though  it  may  be  mingled  among 
all  sorts  of  other  work  at  various  points  on  its  way.  This 
is  something  like  the  way  in  which  an  address  carries  a  let- 
ter to  its  destination,  although  that  letter  travels  part  of  the 
way  in  the  mail  bag  with  thousands  of  other  letters.  Rec- 
ords of  starting  and  finishing  times-  for  each  job  are  made 
on  the  individual  job  tickets;  these  serve  as  checks  against 
the  total  time  of  the  workmen  employed,  and  afford  data 
for  cost  computations.  Manifold  copies  of  the  production 
orders  and  the  work  orders,  sent  ahead  to  the  departments 
participating  in  their  production,  notify  these  departments 
of  work  in  progress  for  which  preparation  must  be  made. 
When  the  original  comes  through  with  the  completed  job 
it  falls  naturally  into  the  files  under  the  same  number  with 
the  manifold,  thus  automatically  announcing  and  identify- 
ing itself.  Manifolds  of  which  the  originals  have  not  yet 
appeared  reveal  work  unfinished  or  delayed.  You  have 
here  a  hint  at  the  basis  of  the  system  of  stock  tracing  by 
which  the  operations  of  the  plant  may  be  kept  up  to 
schedule. 

It  will  be  noticed,  probably,  that  the  cycle  of  manufactur- 
ing begins  and  ends  in  the  stores  department.  Before  the 
operations  can  begin,  material  must  be  secured  from  the  stores 
department  by  authorized  requisition.  When  the  process 
is  complete,  the  finished  goods  are  delivered  to  the  stores 
department  again  for  shipment  or  delivery.  Indeed,  mate- 
rial is  supposed  to  be  always  in  the  custody  of  the  stores 
department  —  is  supposed  to  be  and  often  is  actually  returned 
to  the  stores  department  after  each  successive  step  or  opera- 
tion in  the  entire  process  of  manufacture.  It  is,  therefore, 


74  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

frequent  and  very  good  practice  to  proceed  upon  the  theory 
that  the  stores  department  is  the  responsible  agency  for  see- 
ing that  a  stock  of  both  finished  product  and  raw  material 
is  always  maintained  sufficient  to  meet  the  expected  demands; 
that  all  shipping  orders  are  issued  to  the  stores  department 
and  not  to  the  manufacturing  department;  and  that  what- 
ever manufacturing  orders  are  necessary  for  the  maintenance 
of  the  warehouse  stock  of  finished  product,  shall  be  issued 
by  the  storeskeeper.  Even  in  the  case  of  special  machinery 
the  same  routine  can  be  observed,  except  that  in  that  case 
the  finished  product  of  Course  will  not  be  stock  and  will  have 
to  be  manufactured  in  accordance  with  the  special  designs 
after  the  shipping  order  has  been  received.  A  very  impor- 
tant function  of  the  stores  department,  therefore,  is  to  insure 
against  delays  or  interruptions  either  to  manufacture  or  to 
shipment  which  would  occur  if  items  in  the  stock  of  either 
raw  or  finished  goods  were  allowed  to  run  out,  and  at  the 
same  time  to  avoid  tying  up  an  unnecessary  amount  of  capi- 
tal in  wasteful  idleness  by  keeping  too  large  a  stock  either 
of  raw  materials  or  of  finished  product  on  hand.  The 
actual  procurement  of  raw  materials  is  generally  handled  by 
a  sub-department  called  the  purchasing  department,  which  is 
responsible  for  quality,  prices,  and  arrivals  of  the  requisite 
supplies,  but  makes  purchases  only  upon  requisition  from  the 
stores  department,  so  far  at  least  as  materials  are  concerned. 
In  many  cases  machinery,  tools,  fuel  or  equipment  not  clas- 
sified as  raw  material  for  manufacturing  purposes  and  not 
kept  in  the  storekeeper's  stock,  are  purchased  directly  upon 
requisition  from  departments  by  which  they  are  used. 

The  last  great  industrial  function  recognized  by  a  sepa- 
rate department  is  selling.  In  several  senses  it  dominates 
the  whole.  Things  are  not  usually  made  unless  they  can 
be  sold.  In  cases  of  special  manufacturing,  such  as  ma- 
chinery made  to  order  from  individual  plans,  the  manufac- 
turing plant  produces  what  the  sales  department  specifies. 


FORMS    OF    INDUSTRIAL    OWNERSHIP  75 

In  the  case  of  standard  stock  manufacturing,  like  watches 
or  sewing  machines,  it  turns  out  an  article  for  which  the 
sales  department  can  find  a  demand.  On  the  other  hand, 
the  operations  of  the  sales  department  will  not  result  in 
profits  unless  they  are  carried  on  with  a  correct  knowledge 
of  manufacturing  department  costs,  of  the  limits  of  the  manu- 
facturing department's  ability  or  capacity,  and  so  on.  There 
must  be  close  co-operation  and  co-ordination.  The  engi- 
neering department  is  to  a  considerable  extent  the  co-ordinat- 
ing center  between  manufactures  and  sales.  But  being  a 
little  nearer  to  the  latter,  it  is  usually  found  forming  a  sub- 
division or  part  of  the  selling  department. 

Certain  very  able  critics  have  urged  forcibly  that  modern 
tendencies,  especially  American  tendencies,  are  toward  over- 
magnification  of  the  salesman  and  his  functions,  and  under- 
appreciation  of  the  engineer  and  his  capabilities.  It  is  a 
natural  frailty,  whether  human  or  commercial.  The  sales- 
man is  the  man  who  brings  the  money  in.  The  engineer 
usually  directs  its  outgo.  The  man  who  visibly  or  ap- 
parently stands  nearest  to  income  and  profits  has  the  first 
consideration.  But  it  is  a  serious  fact  that  in  a  large  way  we 
have  nationally  devoted  too  much  thought  to  obtaining  and 
raising  prices  —  a  salesman's  function  —  and  too  little  to 
lowering  the  costs  of  production  —  an  engineer's  function. 
Attention  to  lowering  production  costs  by  cultivating  higher 
efficiency,  by  eliminating  wastes  of  material,  of  labor,  of 
power,  or  of  any  other  industrial  element,  is  now  at  a  phase 
of  rapid  increase.  It  is  here  that  the  greatest  opportunity 
lies  for  the  industrial  engineer  and  the  works  manager. 


THE  NATURE  OF  EXPENSE 


CHAPTER  V 

THE  NATURE  OF  EXPENSE 

LEAVING  now  the  general  principles  of  industrial  or- 
ganization and  the  institutions  and  agencies  by  which 
industrial  operations  are  carried  on,  we  may  view  the  prob- 
lems of  manufacturing  as  they  present  themselves  to  the 
works  manager  and  study  the  several  elements  of  these  prob- 
lems from  his  characteristic  point  of  view.  In  practice,  the 
processes  of  manufacture  fall  naturally  into  four  great  di- 
visions:—  First,  gathering  materials  of  various  sorts  neces- 
sary to  the  product  we  plan  to  turn  out;  second,  operating 
upon  these  materials  in  some  way  so  as  to  change  their  form, 
condition,  combination,  location,  or  bulk;  third,  distributing 
again  among  buyers  that  which  we  have  previously  gathered 
and  manufactured;  fourth,  overseeing,  safeguarding  and 
promoting  the  whole  cycle.  To  put  it  more  briefly,  the 
steps  are:  procuring  raw  materials,  making  them  into  finished 
product,  selling  our  goods,  managing  the  business.  To  re- 
duce it  to  four  words,  the  functions  are  purchase,  produc- 
tion, selling,  administration.  All  are  necessary  to  the  con- 
duct of  a  manufacturing  business,  but  to  the  manufacturer's 
mind  some  elements  in  the  scheme,  such  as  outlay  for 
material  and  direct  labor,  seem  to  be  visibly  embodied  in  the 
finished  product,  and  these  he  calls  "productive";  others, 
like  the  outlay  for  administration,  are  only  indirectly  identi- 
fied with  the  finished  product,  and  are  classed  by  him  as 
"  non-productive."  Therefore,  as  the  manufacturer  always 
thinks  in  terms  of  cost,  every  proposition  in  production  ap- 
pears in  his  mind  as  consisting  of  three  terms  —  labor, 
materials,  and  expense. 

79 


80  PRINCIPLES   OF    INDUSTRIAL    ENGINEERING 

Let  us  examine  this  position  again  in  more  detail  and 
from  a  slightly  different  angle  of  vision.  All  business  is 
carried  on  for  the  sake  of  making  money.  In  the  simplest 
conceivable  kind  of  accounting,  we  would  put  down  on  one 
side  of  the  account  or  in  one  place  a  list  of  everything  we 
spend  in  the  course  of  carrying  on  our  business,  and  on  the 
other  side  of  the  account  or  in  another  place  we  would  put 
down  a  list  of  everything  we  receive.  The  difference  be- 
tween the  sums  of  these  two  lists  would  be  our  profit. 

Now  if  our  business  is  manufacturing,  we  shall  always 
find,  if  we  examine  the  items  on  the  debit  side  —  that  is,  the 
list  of  expenditures  —  that  these  items  fall  naturally  into 
three  great  groups  corresponding  to  three  distinct  sorts  of 
thing  for  which  our  money  has  been  expended.  One  of 
these  groups  will  contain  all  the  expenditures  for  the  ma- 
terials we  use  in  our  manufacturing  —  iron,  steel,  brass, 
wood,  cloth,  whatever  it  may  be.  The  second  of  the  three 
great  groups  into  which  we  can  divide  our  expenditures  will 
contain  all  the  outlay  for  labor  —  the  money  that  we  have 
paid  to  men  for  working  and  making  up  these  materials 
into  our  manufactured  product;  and  the  third  of  the  great 
groups  will  contain  a  list  of  expenditures  for  things  that  do 
not  go  into  our  product  as  labor  and  materials  do,  but  yet 
are  necessary  to  carry  on  the  business.  Such  items  are 
advertising,  selling,  office  salaries,  insurance  and  repairs  and 
so  on.  This  third  great  group  of  expenditure,  then  —  this 
group  of  items  of  outlay  for  things  that  are  necessary  to 
carrying  on  the  business  and  yet  do  not  go  directly  into 
the  product  —  this  is  called  expense. 

In  one  sense  there  is  not  an  absolutely  hard  and  fast 
line  between  these  three  classes  of  expenditure.  In  one 
sense  expense  overlaps,  so  to  speak,  both  material  and 
labor.  For  example,  in  a  foundry,  moulding  sand  is 
physically  speaking  "  material."  In  a  brick  yard,  lumber 
for  runways  is  in  the  same  sense  a  "  material."  But  in 


THE    NATURE    OF    EXPENSE  8 1 

neither  case  does  it  go  into  our  product.  It  is  not  sold 
with  our  product.  We  can  not  find  or  weigh  or  measure 
a  fragment  of  it  in  each  piece  of  our  product.  It  is  used 
up  and  disappears,  but  the  cost  belongs  to  the  business  as 
a  whole. 

So  men  carrying  messages  about  a  factory,  or  carting 
shavings  from  a  planing  mill,  are  humanly  speaking  "  la- 
borers " —  labor.  But  again  they  are  doing  work  that  can 
not  be  directly  charged  to  any  particular  job  —  it  is  part 
of  the  necessary  general  cost  of  the  work  as  a  whole. 

From  the  accounting  point  of  view,  then,  the  deciding 
question  is  —  does  the  material  or  the  labor  go  directly  into 
product;  can  we  trace  it  there  and  say  definitely  u  so  much 
material  and  so  much  labor  make  up  this  article  " —  or 
does  it  merely  serve  in  some  general  way  the  making  of 
all  or  many  of  the  articles  we  are  turning  out?  If  the 
latter,  then  it  is  an  expense  item,  to  the  accountant,  even 
though  in  a  dictionary  sense  it  might  seem  to  be  material  or 
labor. 

Some  accountants  recognize  this  sort  of  double  character 
of  certain  items  by  calling  them  "  expense  material  "  and 
"  expense  labor."  It  is  more  common,  however,  to  speak 
of  the  three  divisions  of  cost  as  direct  material  (or  simply 
material)  direct  or  productive  labor,  and  "  expense  "  in- 
cluding in  the  latter  term  all  indirect  material  and  labor. 

Whether  the  manufacturer's  money  is  expended  for  ma- 
terials, for  labor,  or  for  expense  items,  he  has  one  great 
general  object,  and  that  is  that  it  shall  be  expended  wisely, 
economically,  and  efficiently.  But  when  we  get  beyond  this 
first  principal  purpose  and  care,  which  is  always  in  a  manu- 
facturer's mind,  we  can  readily  see  that  the  things  to  be 
considered  second  are  of  different  and  characteristic  natures 
in  the  case  of  materials  and  of  labor  and  of  expense. 

The  points  in  which  the  manufacturer  is  especially  inter- 
ested, so  far  as  concerns  materials,  are  to  make  sure  that 


82  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

they  are  provided  and  maintained  in  sufficient  quantity  for 
the  operations  of  manufacture  to  go  on  without  interruption, 
that  receipts  are  verified,  materials  on  hand  properly  stored 
and  cared  for,  and  materials  in  manufacture  moved  safely 
and  in  an  orderly  way  from  process  to  process  until  the 
manufactured  product  is  complete. 

In  the  case  of  labor  the  manufacturer's  leading  care  and 
anxiety  is  to  secure  enough  workers  of  desirable  quality, 
to  keep  them  contented,  to  increase  their  productivity,  and 
to  keep  track  of  their  time. 

The  fundamental  problem  of  expense  is  distribution. 
That  is,  if  our  business  is  to  be  intelligently  and  success- 
fully carried  on,  after  we  have  accounted  for  the  money  that 
we  have  paid  for  materials  and  found  out  how  much  of  it 
has  gone  into  each  unit  we  have  manufactured,  and  after 
we  have  paid  for  our  labor  and  accounted  for  the  time  and 
wages  spent  upon  each  unit  of  our  product,  we  must  be  able 
to  take  the  rest  of  our  expenditures  —  the  confused  total  bulk 
of  general  expense,  which  is  neither  direct  labor  nor  direct 
material  and  to  divide  it  up  into  a  multitude  of  little  frac- 
tions, each  corresponding  to  one  unit  of  our  product,  and 
we  must  make  this  division  and  u  levy  this  assessment  "  so 
that  we  can  say  confidently  that'  we  have  charged  each  unit 
with  its  fair,  reasonable,  and  just  proportion;  that  we  have 
assessed  to  each  unit  of  product  the  actual  cost  of  the  ma- 
terial that  went  into  it  and  the  labor  that  was  put  upon  it, 
and  its  proper  share  of  the  general  expense  of  carrying  on 
the  business.  If  we  do  this  correctly  we  are  sure  that 
when  we  have  added  to  these  costs  a  proper  percentage  of 
profit,  we  will  make  money  if  we  can  find  a  market  for 
our  goods. 

The  importance  of  being  right  about  it  is  this:  If  we 
make  a  mistake  in  the  distribution  and  charge  some .  one 
line  of  our  product  with  more  expense  burden  than  it  ought 
to  bear,  a  clever  competitor  who  knows  his  costs  better 


THE    NATURE    OF    EXPENSE 


than  we  know  ours,  will  make  a  lower  price  which  still 
leaves  him  a  safe  margin  and  he  will  undersell  us  and 
take  away  our  market.  If  we  charge  some  one  line  of  our 
product  with  less  expense  burden  than  it  ought  to  bear, 
we  shall  probably  get  the  business  in  that  line  away  from 
our  wiser  competitors  who  are  asking  correct  prices,  but 
the  more  we  sell  the  more  money  we  shall  lose. 

In  other  words,  the  reason  that  makes  it  necessary  to 
have  a  correct  knowledge  of  our  costs  is  competition.  "And 
in  the  correct  knowledge  of  costs,  the  most  difficult  and 
at  the  same  time  the  most  necessary  thing  is  the  correct 
distribution  of  expense.  Mr.  A.  Hamilton  Church,  who 
is  one  of  the  leading  authorities  on  the  distribution  of  ex- 
pense burden,  says:  "  Very  few  concerns  have  come  to  grief 
by  ignoring  labor  costs  "  (or  he  might  add  material  costs), 
"  but  many  have  passed  into  the  hands  of  receivers  by 
ignoring  the  relative  importance  of  other  factors  of  pro- 
duction." 


K 


Selling  Price  — 
$600 

—  Inclusive  or  Total  Cost™ 
$500 

-Shop  Cost~  —  >! 

$400 
Prime  or  Flat  Cost—     —  *i 


^i 

"1 


$150 
Material 

$150 
Labor 

$100 

Factory 
Expense 

$100 

General 
Expense 

$100 
Profit 

We  may  represent  by  this  simple  diagram  the  several  frac- 
tions making  up  total  costs,  and  the  several  parts  of  which 
the  final  selling  price  of  an  article  is  made  up.  The  relative 
proportions  of  material  and  labor,  factory  expense,  selling 
expense,  and  profit  vary  widely  in  different  cases.  The  pro- 
portions used  in  the  diagram  are  wholly  arbitrary,  but  are 
not  improbable. 


84  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

The  figure  serves  to  show  the  significance  of  the  terms 
commonly  used  in  cost  accounting,  and  to  emphasize  the 
division  of  expense  into  two  parts,  the  first  called  u  factory," 
"  shop,"  or  "  manufacturing "  expense,  and  the  second 
called  "  general,"  "  commercial,"  or  "  selling "  expense. 
This  division  is  commonly  in  use  and  is  logical.  There  is 
no  necessary  connection  between  the  expense  attending  the 
making  of  an  article  and  the  expense  of  selling  it.  They 
may  be  relatively  very  different.  There  is  hence  no  reason 
why  these  two  expense  elements  should  be  distributed  at 
the  same  time  or  in  the  same  ratio,  and  indeed  there  are 
many  reasons  why  they  should  not. 

The  discussion  following  will  leave  until  last  the  rational 
mode  of  apportioning  general  expense  among  the  varied 
products  of  any  establishment,  and  will  take  up  first  and 
at  greatest  length  the  distribution  of  factory  expense. 

Now  if  our  product  is  simple  and  all  of  one  kind,  the 
determination  will  be  easy  enough.  It  is  when  product  is 
diversified  that  accurate  cost  accounting  becomes  difficult 
and  at  the  same  time  becomes  more  important.  Suppose, 
for  example,  we  are  running  a  cotton-seed  oil  mill  and  mak- 
ing a  single  grade  of  oil.  The  cost  per  pound  is  very 
simply  found  by  dividing  total  expenditures  by  the  total 
number  of  pounds  made.  But  suppose,  further,  we  decide 
to  branch  out  and  work  up  our  own  product.  We  install 
a  refinery  and  begin  to  put  out  a  fancy  grade  of  oil  for 
table  use;  we  get  up  a  "  lard  substitute  ";  we  install  a  soap 
works  and  make  several  grades  of  toilet  and  laundry  soap ; 
we  follow  with  a  glycerine  plant;  and  finally  we  manage 
to  do  something  with  several  kinds  of  by-products.  Now 
we  have  a  number  of  different  products,  selling  at  very 
different  prices,  in  different  markets,  and  under  different 
conditions  of  competition.  There  may  be  big  money  in 
lard  compound,  while  the  soap  market  is  so  hard  pressed 
by  competition  or  so  captured  by  large  manufacturers  who 


THE    NATURE    OF    EXPENSE  85 

lavish  money  on  advertising  that  we  can  not  sell  soap  at 
a  profit.  But  unless  we  know  accurately  what  lard  com- 
pound costs  us  per  pound,  or  what  soap  costs  us  per  box, 
how  can  we  tell  that  there  is  a  profit  in  one  and  a  loss  in 
the  other?  How  can  we  know  that  we  should  put  all  our 
raw  material  into  lard  compound  and  cultivate  that  market, 
and  that  we  should  shut  down  the  soap  factory?  Knowl- 
edge of  costs  is  the  guide  to  success  and,  indeed,  a  necessity 
to  existence  in  modern  commercial  manufacturing. 

In  this  exact  determination  of  costs  the  most  troublesome 
factor  as  already  stated  is  the  element  of  expense.  Material 
and  labor  are  fairly  concrete,  definite  and  tangible  things. 
We  can  see  them,  weigh  them,  measure  them,  and  connect 
them  directly  with  the  product  they  assist  to  form.  If  we 
take  any  single  article  in  the  whole  output  of  our  plant, 
whether  it  is  a  pound  of  cottolene,  a  cake  of  soap,  a  hat, 
a  globe  valve  or  a  dynamo,  we  should  be  able  by  com- 
paratively simple  records  and  accounts  to  know  exactly  the 
value  of  the  material  that  went  into  it,  and  exactly  the  out- 
lay for  the  direct  labor  that  has  been  expended  upon  it. 

But  in  the  total  expenditures  of  any  manufacturing  busi- 
ness there  is  a  very  large  outlay  (usually  a  very  large  frac- 
tion of  all  the  outlay)  that  is  not  for  material,  and  is  not 
for  labor,  and  yet  we  must  get  it  back  from  our  customers. 
A  proper  proportion  must  be  repaid  to  us  in  the  price  we 
get  for  each  bit  of  product  we  sell.  If  each  article  sold 
does  not  repay  us  for  its  just  proportion  of  these  general  ex- 
penditures, as  well  as  for  its  just  proportion  of  material 
and  labor,  our  business  will  be  headed  toward  failure  and 
not  toward  success. 

It  is  these  miscellaneous  expenditures,  not  of  themselves 
productive  of  anything  and  yet  necessary  to  the  production 
of  things,  that  make  up  the  expense  account. 

Among  them  are  rent  or  interest  on  the  cost  of  land 
and  buildings,  insurance,  repairs,  salaries  of  general  officers 


86  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

or  officials,  of  clerical  staff  and  all  unproductive  labor, 
power,  light,  heat,  legal  expenses,  advertising  and  selling, 
etc.  The  total  is  a  load  bearing  upon  the  extra  business, 
and  each  item  of  product  must  carry  its  share  —  hence 
the  figure  of  speech,  "  burden." 

The  distribution  of  expense  (that  is,  the  assessment  of 
a  just  and  proper  fraction  of  it  as  a  part  of  the  cost  of 
each  item  of  our  product)  is  not  only  one  of  the  most  dif- 
ficult, but  also  one  of  the  most  controversial  and  most  un- 
satisfactory problems  of  works  management  or  shop  ac- 
counting. This  is  because  expense  is  not  like  the  material 
and  labor  components  of  a  manufactured  product,  which 
are  absolute,  concrete  factors  —  known  quantities  that  are 
permanent,  fixed  and  absolute  in  value.  The  expense 
component  of  any  single  item  is  really  an  elusive  variable, 
to  which  we  give  a  value  arbitrarily  taken  because  it  solves 
some  particular  case  or  problem. 

Let  us  illustrate  the  point  again  by  means  of  a  pocket- 
knife.  Let  us  suppose  the  simplest  possible  conditions  — 
that  we  are  making  nothing  but  one  kind,  size,  and  style  of 
knife.  Suppose  our  cost  records  show  that  the  material  used 
in  this  knife  is  worth  20  cents,  and  the  labor  that  made  it  an- 
other 20  cents.  Our  prime  or  flat  cost,  as  it  is  called,  is  40 
cents.  We  find,  perhaps,  that  by  the  most  careful  and  cor- 
rect compilation  and  distribution  we  can  make  of  all  our  fac- 
tory expense  (that  is,  our  expenditures  for  things  other  than 
material  and  direct  labor),  this  knife  should  be  burdened 
with  an  expense  charge  of  10  cents  —  that  is,  it  should  be 
considered  to  have  cost  20  cents  for  material,  20  cents  for 
labor,  and  10  cents  for  expense,  in  order  to  return  to  us 
our  entire  manufacturing  expenditure.  Let  us  suppose 
that  of  this  10  cents  expense  burden  i  cent  goes  to  pay 
this  knife's  proportion  of  the  president's  salary,  and  I  cent 
goes  toward  the  general  manager's  salary,  and  3  cents  go 
for  other  office  salaries,  and  i  cent  goes  for  rent,  and  i 


THE    NATURE    OF    EXPENSE  87 

cent  for  the  coal  bill,  and  i  cent  for  general  repairs  and 
2  cents  for  sundries. 

Now  suppose  we  had  not  made  this  particular  individual 
knife.  Our  cost  facts  as  to  material  and  labor  would  prove 
their  absolute  truth  by  transposing  the  equation.  We 
should  actually  save  20  cents  for  material  and  20  cents  for 
the  labor.  That  40  cents  would  remain  unexpended  and 
we  should  have  it  in  the  treasury.  We  would  save  40 
cents  in  actual  money  by  refraining  from  the  manufacture 
of  this  particular  article.  But  our  assumed  expense  fact 
goes  all  to  pieces.  We  do  not,  by  not  making  this  knife, 
save  i  cent  on  the  president's  salary,  or  i  cent  on  the  gen- 
eral manager's  salary,  nor  do  we  reduce  our  rent,  or  lessen 
our  repairs,  or  cut  down  any  of  those  other  expense  items 
(except  possibly  the  coal)  by  the  figures  we  attributed  to 
the  expense  burden  of  this  individual  knife.  What  does 
happen  is  that  all  the  other  knives  we  do  make  have  to 
bear  between  them  just  the  same  total  expense  as  before, 
or  a  little  larger  expense  burden  each. 

But  let  us  not  leave  this  example  without  noticing  an- 
other point.  We  have  remarked  so  far  that  a  difference 
of  even  one  knife  more  or  less  in  our  total  product  makes 
a  corresponding  actual  difference  in  our  total  outlay  for  ma- 
terial and  labor,  but  practically  no  difference  in  our  total 
expense  account;  and  we  have  deduced  from  this  that  a 
scheme  of  expense  distribution  that  is  true  for  a  certain 
volume  of  output  becomes  untrue  at  any  other  volume  of 
output,  whether  larger  or  smaller. 

It  would  be  incorrect,  however,  to  assume  that  the  ex- 
pense burden  as  a  whole  does  not  ever  vary,  or  indeed  that 
it  does  not  vary  considerably,  with  varying  volume  of  busi- 
ness. The  truth  is  that  expense  burden  is  made  up  of  a 
large  number  of  elements,  some  of  which  go  up  and  down 
in  general  correspondence  with  the  volume  of  business  and 
some  of  which  do  not.  In  other  words,  our  total  expense 


88  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

is  divisible  into  two  classes  —  constant  and  variable.  The 
former  division  (constant  expense)  includes  all  expense 
items  necessary,  so  to  speak,  to  the  mere  existence  of  the 
business,  while  the  latter  division  (variable  expense)  includes 
all  items  connected  with  the  activity  of  the  business. 

For  example :  In  the  constant-expense  section  we  should 
include  rent,  or  its  equivalent  in  interest,  insurance  and 
taxes,  if  we  own  our  real  estate  and  buildings.  This  clearly 
remains  uniform  or  unchanged,  whether  the  factory  be 
busy  or  idle.  Another  such  item  is  the  salaries  of  general 
officers ;  they  draw  their  pay  the  same  in  good  times  or  in 
bad.  It  is  true  that  on  a  very  great  expansion  of  business 
we  might  have  to  acquire  more  ground  and  put  up  more 
buildings,  or  rent  more  space,  or  enlarge  our  organization 
and  add  more  salaried  officers.  Or  in  very  dull  times  we 
might  give  up  some  of  the  property  we  have  been  renting 
and  we  might  cut  down  official  salaries;  and  so  these  so- 
called  constant  expenses  may  change.  But  if  they  change 
it  is  by  occasional  large  steps  of  this  kind.  They  remain 
level  for  long  periods,  and  there  is  a  minimum  below  which 
they  can  never  go  if  the  business  is  to  continue  to  exist  at 
all. 

On  the  other  hand,  expenses  like  advertising,  selling, 
correspondence,  clerical  assistance,  drafting,  power,  trans- 
portation, foremen,  yard  labor  —  all  these  go  up  and 
down  on  curves  corresponding  closely  and  quite  sensitively 
to  the  amount  of  business  we  are  doing,  and  many  of  them 
can  be  completely  cut  off  if  the  plant  is  wholly  shut  down. 

So  the  second  great  point  to  keep  in  mind  is  that  while 
the  ratio  of  expense  to  productive  labor  and  materials  (or 
in  other  words,  the  proportion  of  our  total  cost  chargeable 
to  expense)  is  variable  and  is  constantly  varying  in  a  way 
that  from  an  accounting  point  of  view  is  very  troublesome, 
this  variation  is  caused  by  the  fact  that  a  certain  very 
large  part  of  our  expense  account  is  constant,  or  nearly  so, 


THE    NATURE    OF    EXPENSE  89 

however  our  total  volume  of  business  may  vary.  It  sounds 
like  a  paradox,  but  the  proportion  of  expense  varies  be- 
cause the  total  of  expense  does  not.  This  fixed  necessary 
outlay  stands  little  changed  from  month  to  month,  while 
the  gross  income  against  which  this  is  balanced  fluctuates 
now  up  and  now  down. 

The  result  is  that  as  business  becomes  more  active  the 
expense  ratio  drops  even  though  the  expense  total  may 
rise,  while  as  business  shrinks  the  expense  ratio  rises  even 
though  the  expense  total  may  fall.  This  is  the  reason  why 
in  dull  times  dividends  on  industrial  and  railways  stocks  are 
so  frequently  reduced  or  passed.  Business  may  be  (say) 
50  per  cent  of  normal;  purchases  are  cut  down,  hours  are 
shortened,  employees  are  discharged,  trains  are  laid  off, 
purchases  of  material  are  suspended,  actual  operations  and 
expenditures  for  actual  production  are  cut  down  to  one- 
half  —  but  profits  do  not  remain  at  half  the  normal.  They 
vanish  entirely  and  a  deficit  appears  instead  because  the  ir- 
reducible constant  expense  eats  all  and  more  than  the  gross 
profits  earned  by  the  50  per  cent  activity. 

To  come  back  now  to  our  imaginary  knife  factory;  we  see 
that  while  we  may  be  certain  enough  what  our  whole  ex- 
pense account  amounts  to,  the  assumption  that  the  indi- 
vidual expense  burden  chargeable  to  each  individual  knife 
is  10  cents  is  an  assumption  only.  It  is  a  convenient  ap- 
proximation to  truth  which  holds  good  under  average  con- 
ditions, but  begins  to  depart  from  truth  as  soon  as  and  as  fast 
as  conditions  depart  from  average.  That  is  the  first  diffi- 
culty in  distributing  expense  burden. 

But  suppose,  further,  we  are  making  not  only  pocket 
knives,  but  also  carving  knives  and  safety  razors.  We  can 
tell  exactly  how  much  material  and  how  much  direct  labor 
each  pocket  knife,  and  each  carving  knife  and  each  safety 
razor  takes.  We  can  tell  exactly  how  much  our  total  ex- 
pense is.  But  how  shall  we  tell  just  how  much  of  this 


90  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

total  expense  is  occasioned  by  the  manufacture  of  a  carving 
knife,  of  a  safety  razor,  or  of  a  pocket  knife,  or  whether 
there  is  more  general  expense  occasioned  by  the  manufac- 
ture of  one  of  these  articles  than  by  another?  Does  forg- 
ing a  carving  blade  consume  more  power  and  use  more  coal 
than  forging  a  pocket-knife  blade,  or  does  timekeeping  and 
clerical  labor  run  higher  in  the  safety-razor  shop  than  it  does 
in  the  pocket-knife  department?  Should,  therefore,  each 
carving  knife  or  each  safety  razor  (for  these  and  other 
similar  reasons)  bear  a  larger  burden  of  expense  than  each 
pocket  knife?  If  so,  how  much? 

May  be  the  carving-knife  account  does  not  show  satis- 
factory profits,  and  we  think  of  giving  up  that  branch  of 
the  business.  But  are  the  apparent  profits  small  because 
we  are  charging  it  with  more  than  its  true  share  of  ex- 
pense, and  thus  relieving  the  pocket  knives  and  the  safety 
razors  of  some  of  the  burden  they  ought  to  bear?  If  we 
drop  the  manufacture  of  carving  knives,  will  our  expense 
account  drop  by  the  amount  of  burden  we  have  been  charging 
up  to  the  carving-knife  department,  or  shall  we  still  find  the 
same  old  expense  totals  bearing  now  wholly  on  pocket 
knives  and  safety  razors  and  shall  we  be  worse  off  rather  than 
better?  Would  it  be  sound  policy,  instead  of  abandoning 
any  line,  to  add  still  another  that  would  bring  a  reasonable 
profit  over  the  flat  cost  of  materials  and  labor,  in  the  ex- 
pectation that  in  fact  no  increase  of  expense  would  be  oc- 
casioned, and  we  should  be  just  that  much  ahead  on  our 
total  profit  and  loss  account? 

Here  we  see  the  second  difficulty  in  the  expense  distri- 
bution, which  is  to  apportion  the  total  properly  among 
the  several  or  many  lines  of  product  in  a  varied  manu- 
facturing business,  so  that  the  calculated  costs  of  each  (on 
which  we  base  our  selling  prices)  may  be  as  near  as  possible 
to  truth.  Then  whatever  line  may  expand  or  contract  we 


THE    NATURE    OF    EXPENSE  9! 

shall  be  safe  from  disastrous  disappointment  in  the  total 
of  our  profits. 

In  order  to  see  more  clearly  how  the  proportion  of  ex- 
pense justly  chargeable  to  various  lines  of  products  may  vary 
—  that  is,  how  various  components  of  expense  are  created 
in  unequal  proportion  by  various  classes  of  manufactured 
goods,  and  hence  should  be  borne  with  corresponding  in- 
equality by  these  various  classes  —  and  to  see  also  some  of 
the  considerations  affecting  the  distribution  of  expense,  let  us 
imagine  that  we  are  making  a  hasty  tour  through  a  machine- 
shop  and  let  us  see  in  part  how  and  where  the  burden  is 
created.  We  will  assume  that  the  shop  makes  its  own 
castings  and  we  will  begin  with  the  foundry.  The  material 
(pig  iron)  and  the  labor  of  molders,  helpers,  core-makers, 
etc.,  on  each  and  every  job  and  piece,  can  be  pretty  closely 
recorded,  so  that  our  material  and  direct-labor  costs  are 
reasonably  exact.  But  here  are  some  men  who  are  not  en- 
gaged in  making  any  special  casting  into  which  their  work 
goes  and  to  which  it  can  be  charged;  they  are  wheeling  sand, 
shaking  out  flasks,  charging  the  cupola.  Here  is  coke  go- 
ing into  the  cupola  to  be  burned,  and  power  being  used  for 
the  cupola  hoist  and  for  furnishing  the  blast.  Without 
searching  any  further,  we  find  already  an  aggregated  out- 
lay —  an  expense  burden  —  which  we  can  not  attach  to  any 
one  piece  of  material  or  to  any  one  job,  but  which  we  must 
distribute  somehow  among  all  the  jobs  done  that  day  or 
on  that  melt. 

We  see  however,  further,  that  there  is  another  cupola 
on  which  men  are  busy  making  repairs.  Evidently  there 
is  an  outlay  for  refractory  linings,  labor,  and  incidentals, 
which  must  somehow  be  loaded  on  to  the  foundry  product 
and  repaid  by  its  sale.  We  must  keep  our  cupola  in  re- 
pair; it  costs  money  to  repair  it,  and  we  must  manage  to 
get  our  money  back.  But  this  expense  was  incurred  through 


92  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

wear  and  tear  attending  the  melting  of  iron  for  all  the 
castings  made  in  a  week  or  a  month,  perhaps.  Our  total 
of  this  repair  bill,  then,  must  be  distributed  over  the  jobs 
of  that  whole  period  if  each  is  to  bear  its  fair  burden. 

We  see,  further,  that  other  men  are  at  work  removing 
dust  from  the  rafters,  repairing  the  roof,  and  white-wash- 
ing or  painting  the  whole  foundry  building.  They  are 
remedying  the  deterioration  or  decay  of  possibly  a  year. 
Again,  money  spent  in  general  expenses,  to  be  recovered 
in  the  sale  of  product.  Here  is  another  item  of  burden  to 
be  spread  over  a  still  wider  section  of  our  output. 

Here,  in  all  these  cases,  we  have  burden  limited  in  dis- 
tribution according  to  time. 

We  pass  to  the  machine-shop,  and  we  see  a  large  overhead 
crane  transporting  a  heavy  engine  bed  to  the  planer.  The 
crane  itself  represents  invested  capital  which  is  disappearing 
constantly  year  by  year  as  the  machine  in  which  it  is  in- 
vested wears  out.  Furthermore,  it  costs  money  to  run  that 
crane  —  money  for  interest  on  the  investment  required  for 
its  installation,  for  power  to  run  the  crane,  for  the  man  who 
operates  it.  Some  of  this  cost  accumulates  night  and  day, 
whether  the  crane  is  running  or  is  idle;  some  accrues  only 
when  it  is  in  operation.  But  it  accrues,  and  we  must  charge 
it  against  our  product  somehow  and  get  it  returned  to  us 
with  profit.  Evidently,  though,  it  would  be  unfair  to  levy 
any  of  it  against  our  lighter  lines  of  manufacture,  which  do 
not  need  crane  service  and  never  use  it.  On  the  other 
hand,  here  is  a  little  industrial  railway  used  for  moving 
light  and  medium-weight  pieces  around  the  shop.  This  is 
an  expense  item  of  similar  sort,  but  here  the  burden  is  not 
chargeable  against  heavy  product. 

Here  we  have  burden  limited  in  distribution  by  weight  or 
character  of  product. 

We  enter  the  lathe  department  and  find  a  foreman  in 
charge.  His  wages  are  paid  him  every  week  and  enter 


THE    NATURE    OF    EXPENSE  93 

into  the  total  of  our  manufacturing  costs,  but  they  do  not 
appear  on  the  job  tickets  for  any  of  the  individual  items 
of  work  handled  on  the  lathes.  His  wages,  also,  then, 
must  be  taken  care  of  in  the  manufacturing-expense  burden; 
but  they  are  incurred  in  connection  only  with  the  lathe 
work,  and  in  justice  no  fraction  of  them  should  be  attached 
to  any  of  our  manufactured  product  which  has  not  had  lathe 
work  done  upon  it. 

Here  we  have  burden  limited  in  distribution  by  the  char- 
acter of  operation. 

As  we  pass  through  the  shops,  we  notice  here  and  there 
a  timekeeper  at  work,  securing  data  as  to  the  times  when 
jobs  had  been  begun  or  finished,  and  here  as  we  approach 
the  offices  is  a  room  where  several  clerks  are  entering  the 
time  records  and  computing  premiums  or  bonuses.  Evi- 
dently this  is  a  necessary  auxiliary  to  our  productive  system, 
although  it  is  itself  unproductive.  The  cost  of  the  employ- 
ment of  these  clerks  and  of  attendant  expenses  must  go  into 
our  burden;  what  particular  fraction  of  it  is  theoretically 
attached  to  any  particular  machine  we  manufacture  and 
sell,  obviously  should  depend  upon  the  complexity  of  that 
machine  —  the  number  of  parts,  and  hence  of  operations 
and  times,  which  had  to  be  recorded,  and  the  demands  its 
computations  and  calculations  make  upon  the  time  and 
services  of  the  time  clerks.  Here  we  have  burden  varying 
according  to  the  complexity  of  the  product.  Next,  if  we 
look  into  the  sales  office  (as  we  should  do)  we  shall  see 
a  probably  large  and  expensive  force  of  men,  with  the  aid 
of  considerable  outlay  for  office  assistants,  advertising,  and 
publicity  work.  The  total  of  this  expense  —  of  this  com- 
mercial burden  —  must  be  taken  care  of,  and  if  we  look 
into  it  we  shall  probably  find  that  the  necessity  for  these 
expenses  varies  very  widely  between  different  lines  of  our 
manufacture.  Standard  product  disposed  of  through 
dealers  probably  almost  sells  itself.  Special  business,  or 


94  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

new  business  for  which  the  market  must  be  created,  prob- 
ably costs  a  great  deal  to  work  up.  Here  we  have  burden 
varying  according  to  commercial  conditions. 

It  will  be  apparent  from  the  view  we  have  had  so  far 
that  no  absolute,  mathematically  correct  and  invariably 
true  distribution  of  expense  can  be  made.  We  must  ac- 
cept some  reasonably  fair  distribution  that  will  serve  within 
allowable  limits  of  error  under  ordinary  fluctuations  in  busi- 
ness, and  we  must  give  separate  and  careful  attention  to 
extraordinary  conditions  that  may  make  our  methods  and 
figures,  temporarily  at  least,  inaccurate.  The  methods 
generally  used  are  more  or  less  rough-and-ready  approxima- 
tions, convenient  to  use,  sometimes  as  misleading  as  they 
are  convenient,  but  often  quite  good  enough  for  practical 
purposes,  especially  as  the  experienced  industrial  manager 
has  a  sort  of  sixth  sense,  or  specially  trained  common-sense, 
by  which  he  corrects  the  occasional  false  readings  of  his 
cost  system. 

These  methods  will  be  outlined  in  the  following  chapter.1 

1  A  very  thorough  discussion  of  this  subject  will  be  found  in  "  The 
Distribution  of  Expense  Burden,"  by  A.  Hamilton  Church ;  The  Engineer- 
ing Magazine. 


DISTRIBUTION  OF  EXPENSE 


CHAPTER  VI 

DISTRIBUTION  OF  EXPENSE 

ONE  underlying  idea  appears  in  all  the  methods  of  ex- 
pense distribution  or  apportionment  that  are  com- 
monly employed.  It  is  this :  Expense,  as  has  been  re- 
peatedly pointed  out,  does  not  naturally  connect  itself 
with  individual  jobs  or  individual  units  of  product.  It 
gathers  like  one  general  cloud  over  the  whole  business,  but 
not  in  distinct  wreaths  around  each  transaction.  Material 
and  direct  labor,  however,  do,  from  the  beginning,  identify 
themselves  with  individual  operations  or  individual  units 
of  product.  You  can  almost  see  each  job,  as  it  goes  through, 
attach  to  itself  successive  items  of  material  and  of  work. 
You  can  see  each  man  and  each  machine  putting  material 
and  work  together,  in  visible  and  measurable  quantities, 
until  each  piece  of  product  is  completed.  Now,  the  under- 
lying idea  of  all  methods  of  expense  distribution  or  appor- 
tionment is  to  use  some  one  or  more  of  these  visible,  tangible, 
measurable  elements  as  a  gauge,  and  to  pro-rate  the  ex- 
pense allotment  by  it.  That  is,  they  burden  each  job  or 
each  unit  of  product  in  proportion  to  the  material  that 
goes  into  it,  or  the  wages  paid  for  it,  or  the  time  spent 
working  on  it,  or  the  use  it  makes  of  the  machines  and 
other  facilities  in  the  factory.  This  gives  us  five  cardinal 
methods  of  expense  distribution :  By  material,  by  percentage 
on  wages,  by  man  hours,  by  machine  rates,  and  by  produc- 
tion factors.  We  will  take  up  their  operation  and  their 
characteristics  successively. 

Distribution    of    expense    by    material    is    a    method    of 
limited    applicability.      Its    usefulness    is    confined    to    com- 

97 


98  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

paratively  simple  industries  such  as  metallurgical  or 
structural-material  works,  where  the  product  is  nearly  or 
quite  uniform.  In  a  brick  yard,  or  a  blast-furnace  plant, 
or  a  gas  works  or  perhaps  in  a  pipe  foundry  or  other 
establishments  of  like  character,  it  may  work  as  well  as 
any  other  plan,  simply  because  there  is  no  need  of  distribu- 
tion, properly  speaking,  but  only  of  equal  sub-division. 
Indeed,  if  the  product  of  a  plant  is  absolutely  homogeneous 

—  all  just  alike  —  it  makes  no  difference  whether  you  ap- 
portion expense  by  count  or  weight  or  measure  or  flat  cost 

—  you  can  not  get  wrong  as  between  one  unit  and  another. 
An  expense  rate  per  ton  or  per  thousand  is  quite  sufficient 
for  purposes  of  estimating  or  for  comparison  between  one 
period  and  another.      But  when  the  product  is  not  all  alike, 
the  introduction  of  material  into  expense-distribution  calcula- 
tions only  confuses  and  distorts  results.     In  the  remaining 
methods,  therefore,  we  shall  hear  no  more  of  material  or 
value  of  material. 

The  percentage-on-wages  method  of  apportioning  factory 
expense  is  probably  the  most  generally  used.  As  a  start- 
ing point  in  this  method,  we  take  the  total  for  a  given  time 
(say  a  month  or  a  year)  first  of  the  wages  of  the  productive 
labor  during  that  period,  and  second  of  the  factory  expense 
during  the  same  period,  and  we  find  what  is  the  percentage 
relation  of  the  expense  to  these  wages  paid  to  productive 
labor.  Suppose  we  find  that  the  total  factory  expense  is 
60  per  cent  of  the  direct  labor  payroll;  then  we  load  every 
job  done  during  the  period  with  60  cents  additional  for 
each  dollar  of  direct  wages  that  is  expended  upon  it.  If 
we  find,  for  instance,  that  a  certain  small  steam  pump  is 
shown  by  the  job  ticket  to  have  cost  $50  for  material  and 
$100  for  labor,  we  add  60  per  cent  of  $100,  or  another 
$60,  for  the  factory  burden,  and  obtain  as  the  shop  cost  of 
the  product  $50  plus  $100  plus  $60  equals  $210. 

If  our  output  is  all  substantially  of  the  one  general  class, 


DISTRIBUTION    OF    EXPENSE  99 

and  if  the  various  machines,  tools,  or  pieces  of  apparatus 
in  our  manufacturing  plant  are  not  very  different  one  from 
another  as  to  expense  of  operation,  and  if  our  wages  are 
fairly  uniform  as  between  one  operative  and  another,  the 
results  obtained  by  this  method  will  be  quite  accurate.  But 
if  we  have  a  great  difference  in  equipment,  having  some 
very  smr/ll  machines  taking  little  room  and  power,  and 
cheaply  operated,  and  some  very  large  machines  taking  up 
a  great  deal  of  room  and  power,  and  involving  large  ex- 
pense for  operation  and  wages;  if  we  have  passing  through 
the  shop  some  very  heavy  work  and  some  very  small  and 
light  work;  if  some  of  our  labor  is  highly  paid  and  some  is 
very  cheap  —  this  method  may  lead  to  very  inaccurate  re- 
sults. A  job  of  fitting,  taking  50  cents  worth  of  a  man's 
time  on  a  little  bench  lathe,  tucked  away  in  an  otherwise 
useless  corner,  would  be  burdened  just  .the  same  as  a  job 
taking  50  cents  worth  of  a  man's  time  on  a  huge  costly 
boring  mill,  occupying  the  whole  end  of  a  building;  for  the 
percentage-on-wages  method  recognizes  only  the  one  visible 
factor  of  money  paid  for  human  labor  and  ignores  differences 
in  the  extent  to  which  different  items  of  product  make  use 
of  mechanical  equipment.  As  a  large  proportion  of  the 
expense  burden  arises  from  the  cost  of  installing  and  re- 
pairing machinery,  and  moving  product  to  and  from  the 
machines,  we  can  not  arrive  at  true  results  by  a  method  of 
averaging  that  allows  no  weight  to  this  particular  factor. 

The  third  method  is  the  man-hour  plan.  It  varies  from 
the  preceding  system  in  that  the  distribution  is  made  pro- 
portionate to  the  time  worked  on  each  job  instead  of  to  the 
money  paid  for  that  time.  At  the  first  glance  this  might 
seem  like  the  same  thing,  but  on  further  consideration  it 
will  become  evident  that  there  are  important  differences. 
For  example,  suppose  we  take  a  job  away  from  a  $3-a-day 
man,  and  give  it  experimentally  to  a  good  clever  $i.5<>a- 
day  helper  who  completes  it  in  the  same  number  of  hours 


100  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

that  his  predecessor  did.  Under  the  man-hour  plan  it  will 
still  carry  the  same  expense  burden  as  it  did  before,  be- 
cause it  takes  the  same  time.  This  is  a  correct  result,  for 
the  mere  change  of  operative  has  not  changed  in  any  way 
the  demand  which  the  work  makes  upon  the  general  organi- 
zation and  facilities  of  the  plant;  has  not  changed  in  any 
way  the  amount  of  expense  it  creates,  and  hence  should  not 
change  the  expense  apportioned  to  it.  But  under  the  per- 
centage-on-wages  plan,  as  we  saw  a  few  moments  ago,  the 
expense  burden  distributed  to  this  job  would  have  been 
cut  in  half  by  the  mere  fact  that  the  man  who  did  it  was  a 
$1.50  man  instead  of  a  $3  man.  Suppose,  on  the  other  hand, 
the  $1.50  man  proves  clumsy  and  inexpert,  and  takes  twice  as 
long  as  the  $3  man  did  to  finish  the  job.  Under  the  man- 
hour  plan  the  job  would  be  burdened  twice  as  heavily  for 
expense  —  as  it  ought  to  be,  since  it  has  been  twice  as  long 
occupying  floor  space,  occupying  space  on  the  machines,  tak- 
ing the  attention  of  foreman  and  timekeepers  to  look  after 
the  bungling  job.  Under  the  percentage-on-wages  method, 
as  we  saw,  this  slow  job,  done  by  the  cheap  man,  clogging 
up  the  shop  and  delaying  the  progress  of  other  work,  would 
be  charged  with  just  the  same  expense  burden  as  the  job 
done  in  half  the  time  by  the  competent  man,  because  the 
total  wages  were  the  same  in  both  cases. 

In  some  particulars,  therefore,  the  man-hour  plan  is  more 
correct  than  the  percentage-on-wages  plan,  but  when  we 
look  a  little  further  we  find  that,  like  the  percentage-on- 
wages  plan,  it  takes  no  cognizance  of  the  machine  element. 
All  jobs  taking  two  hours  are  burdened  the  same,  whether 
the  two  hours'  time  is  on  a  valve-seat  grinder  or  on  the 
largest  engine-bed  planer  in  the  shop. 

The  machine-hour  method  of  expense  distribution  makes 
a  much  closer  approach  to  accuracy  than  either  of  those  so 
far  described,  because  it  recognizes  the  fact  that  in  modern 
manufacturing  the  producing  unit  is  not  a  single  individual, 


DISTRIBUTION    OF    EXPENSE  IOI 

but  a  complex  combination  of  the  machine  or  piece  of  ap- 
paratus, the  man  or  men  tending  this  machine,  the  equipment 
surrounding  the  machine,  and  the  suitably  prepared  space 
necessary  for  the  installation  and  operation  of  the  machine. 
In  further  explanation  of  this  method  of  expense  distribu- 
tion the  term  "  machine  "  is  used  in  a  general  sense,  with 
the  understanding  that  it  includes  anything  from  a  soap 
kettle  to  a  jeweler's  lathe. 

In  the  administration  of  the  machine-hour  method  of 
apportioning  factory  expense,  the  preliminary  step  is  to  de- 
termine on  an  hourly  basis  the  cost  of  running  each  machine 
in  the  works.  This  cost  includes  the  charge  for  rental, 
lighting  and  heating  of  the  space  the  machine  occupies,  and 
the  surrounding  space  necessary  for  its  operation;  interest 
on  the  cost  of  the  machine  and  allowance  for  repairs  and 
depreciation;  cost  of  power  to  run  the  machine;  cost  of 
services,  such  as  cranage  and  transportation  of  various 
kinds  to  feed  or  to  remove  materials;  cost  of  indirect  labor 
attendant  upon  the  machine;  any  incidental  or  special  ex- 
penses; and  a  just  proportion  of  the  general  burden  of 
administration,  superintendence,  non-productive  factory 
labor,  etc. 

Having  obtained  the  totals  of  these  various  charges  for 
a  month  or  a  year,  they  are  divided  by  the  number  of  hours 
during  that  time  the  machine  can  be  expected  to  run,  this 
figure  being  reached  by  a  careful  study  of  past  experience, 
and  if  necessary  corrected  by  later  actual  observation.  The 
quotient  is  the  hourly  rate  of  that  machine.  Every  job 
coming  to  the  machine  is  then  assessed  with  this  charge  for 
the  number  of  hours  or  fraction  of  an  hour  it  spends  on 
the  machine. 

Evidently,  if  each  machine  in  the  plant  is  thus  rated, 
and  each  job  coming  to  each  machine  is  thus  assessed  with 
its  individual  expense  burden,  and  if  all  the  machines  are 
in  operation  during  the  normal  and  expected  portion  of 


102  PRINCIPLES   OF   INDUSTRIAL    ENGINEERING 

the  time,  the  whole  expense  burden  would  be  distributed  in 
close  accordance  with  the  use  each  job  has  made  of  the 
facilities  of  the  shop.  This  seems  as  fair  a  basis  as  could 
be  found.  The  trouble  begins  when  the  activity  of  the 
plant  differs  largely  from  normal.  The  machine  rates  then 
distribute  too  much  or  not  enough  to  cover  the  actual  ex- 
pense, according  as  the  plant  is  running  overfull  or  is  partly 
idle.  This,  however,  is  the  unavoidable  difficulty  caused 
by  the  inherent  nature  of  expense,  as  pointed  out  at  the 
beginning  of  this  study.  When  too  much  expense  is  thus 
charged  against  the  jobs  of  an  active  period  it  may  be  al- 
lowed to  go  as  a  reserve  to  be  drawn  upon  in  a  sub-normal 
period,  or  it  may  be  credited  back  to  the  operations  of  that 
period  pro  rata.  When  too  little  is  charged,  the  undis- 
tributed expense  remains  to  be  apportioned  by  what  Mr. 
Church  calls  a  "  supplementary  rate,"  either  on  an  hourly 
basis  or  in  the  same  proportion  as  the  original  machine  rate.1 

There  is  another  perplexity  in  the  use  of  machine  rates 
which  need  not  be  discussed  at  length  here,  but  should  be 
noted  in  passing  because  of  the  active  discussion  it  excites 
amongst  accountants.  Suppose  a  small  job,  which  comes 
along  when  its  regular  machines  are  all  full,  is  done  for 
convenience's  sake  on  a  heavy  and  expensive  machine  that 
might  perhaps  otherwise  have  stood  idle;  this  normally  in- 
expensive little  job  is  charged  under  these  peculiar  circum- 
stances with  the  high  machine-hour  rate,  corresponding  to 
the  expensive  machine  on  which  it  was  accidentally  done. 
The  result  is  that  its  cost  appears  abnormally  high.  If  used 
as  an  estimate  for  further  transactions  this  cost  would  lead 
to  distorted  results.  Yet  if  it  is  not  used,  the  rigid  account- 
ant says,  we  are  doctoring  our  records  and  taking  costs  not 
as  they  were,  but  as  we  thought  they  ought  to  have  been. 

This  is  what  is  known  as  the  problem  of  the  penalized 
job.  It  is  somewhat  academic,  and  we  will  not  go  into 

1  "  The  Distribution  of  Expense  Burden." 


DISTRIBUTION    OF    EXPENSE  103 

it  further  than  to  point  out  that  if  the  case  arises  very  often 
in  the  practice  of  any  plant,  it  suggests  some  inefficiency  in 
the  balance  of  the  equipment  which  may  be  remedied  by 
proper  changes. 

Expense  distribution  by  production  factors  is  an  extension 
or  development  of  the  machine-rate  method  influenced  by  a 
new  way  of  looking  at  the  whole  process  of  production.  The 
central  idea  of  it,  as  developed  by  its  sponsor,  Mr.  A.  Ham- 
ilton Church,1  is  that  manufacturing  is  carried  on  by  a  com- 
bination of  what  this  authority  calls  "  services,"  of  which 
labor  is  but  one.  On  account  of  its  vitality  and  visibility, 
labor  (in  Mr.  Church's  view)  has  been  given  undue  promi- 
nence and  placed  by  itself  as  if  it  were  the  only  direct  factor 
and  standard  t>y  which  everything  else  is  measured,  while 
the  various  other  services  have  been  dumped  into  the  ex- 
pense account  which  is  afterwards  redistributed  by  some 
method  of  approximation  or  average  or  percentage  on  labor, 
as  we  have  just  seen. 

Mr.  Church's  production-factor  method  proposes  to  re- 
store these  various  services  to  separate  individual  recognition. 
In  place  of  the  heterogeneous  general  expense  account,  he 
would  keep  separate  accounts  with  every  identifiable  factor 
of  service  other  than  labor,  and  then  he  would  apportion 
these  separate  factor  accounts  separately,  each  by  a  logical 
method  representing  its  actual  relation  to  the  various  lines 
of  manufacture  carried  on.  The  principal  of  these  services 
or  production  factors  other  than  labor  are  Land  and  Build- 
ings, Lighting  Heating  and  Ventilation,  Power,  Stores  and 
Transport,  Organization,  Management  and  Supervision. 
These  are  distributed  by  various  methods  of  apportionment, 
Mr.  Church's  test  question  being  always :  "  How  would  a 
manufacturer  pay  for  this  service  if  (as  might  be  the  case 
with  light  or  power  or  land  and  buildings)  he  purchased  or 

1 "  Production  Factors  in  Cost  Accounting  and  Works  Management,"  by 
A.  Hamilton  Church;  The  Engineering  Magazine. 


104  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

hired  it  from  an  outside  source  instead  of  mingling  the  supply 
of  it  with  his  own  characteristic  function  as  mere  man- 
ufacturer?" Thus,  the  expense  attendant  on  the  provi- 
sion of  land  and  buildings,  or  of  light,  heating  and  ventila- 
tion, is  distributed  on  the  basis  of  square  feet  or  square 
yards  of  floor  space,  or,  to  use  Mr.  Church's  term,  on  "  ca- 
pacity-area ";  power  is  distributed  by  horse-power  years  or 
horse-power  hours;  stores  and  transport  are  assessed  depart- 
mentally,  with  consideration  of  the  weight,  bulk,  activity  of 
movement,  and  other  matters  affecting  the  actual  cost  of 
storage  and  movement  of  materials.  These  separately  dis- 
tributed rates  are  then  combined  into  hourly  rates  applying 
to  various  so-called  "  production  centers,"  a  production  cen- 
ter being  a  machine,  a  group  of  machines,  an  individual 
work  bench,  an  area  of  floor  space,  or  any  distinct  element 
in  the  process  of  manufacture;  these  hourly  production-cen- 
ter rates  are  then  imposed  on  individual  jobs,  as  these  jobs 
in  their  progress  employ  the  time  of  the  different  produc- 
tion centers. 

The  system  evidently  demands  elaborate  preliminary 
study,  but  when  the  production-center  rates  have  once  been 
determined  the  application  thereafter  would  be  no  more  in- 
tricate than  that  of  the  machine-hour  rate,  which  is  in  prac- 
tical and  highly  satisfactory  use.  So  far  as  I  know,  the 
complete  production-factor  method  of  expense  distribution  is 
not  yet  in  service  anywhere.  It  would  produce,  as  Mr. 
Church  points  out,  one  highly  valuable  result  —  that  intel- 
ligent comparison  of  costs  in  different  establishments  could 
be  made  and  the  quantitative  effect  of,  say,  expensive  power 
in  one  locality,  high  rent  in  another,  over-elaborate  organi- 
zation in  the  third,  and  so  on,  would  become  instructively 
apparent.  At  present  it  is  rarely  possible  to  contrast  costs 
in  different  establishments  with  any  effective  practical  re- 
sult, or  at  least  with  any  clear  discovery  as  to  why  they  vary, 


DISTRIBUTION    OF    EXPENSE  105 

or  just  what  points  are  more  efficient  in  one  than  in  the 
other. 

Of  all  the  expense-distribution  systems  outlined,  the  ma- 
chine rate  probably  best  combines  practical  workability  and 
a  reasonable  approach  to  mathematical  correctness.  It  is 
not  as  scientific  as  the  production-factor  method,  but  it  is 
much  more  within  the  comprehension  of  many  industrial  man- 
agers and  within  the  powers  of  the  average  industrial  ac- 
counting staff.  When  it  is  used  the  machines  are  often 
grouped  into  classes  and  class  rates  are  determined  instead 
of  individual  rates  for  each  and  every  machine.  Probably 
only  progressive  managers  will  go  even  as  far  as  this;  but 
this  far  they  will  go,  and  have  gone,  and  the  method  is  in 
every-day  use  and  has  been  in  use .  for  years  in  some  im- 
portant establishments.  Most  plants,  however,  will  still  re- 
fuse to  consider  anything  but  the  percentage-on-wages  or  the 
man-hour  plans.  Either  of  these  can  be  made  fairly  correct 
for  ordinary  purposes,  even  with  diversified  product,  if  this 
product  is  classified  into  homogeneous  groups,  and  an  ap- 
propriate percentage  apportioned  to  each  group,  corre- 
sponding generally  to  its  relative  expense-creating  charac- 
teristics. 

So  much  for  factory  burden. 

The  treatment  of  the  general  expense  presents  substan- 
tially the  same  sort  of  problem  as  the  distribution  of  fac- 
tory expense,  but  the  elements  composing  it  are  not  as  many 
nor  as  complex,  and  hence  the  process  is  not  as  intricate. 
The  principal  components  of  general  expense  are  corre- 
spondence, advertising  and  other  forms  of  publicity,  sell- 
ing, collecting,  accounting,  and  office  administration.  The 
principal  danger  against  which  accountants  generally  have 
to  be  warned  is  that  of  assuming  that  the  scale  used  in  dis- 
tributing factory  expense  may  be  used  also  for  general  ex- 
pense. There  is  no  necessary  relation  whatever  between 


106  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

them;  that  is,  there  is  no  necessary  correspondence  be- 
tween the  proportionate  expense  of  making  an  article  and 
of  selling  it.  A  sufficiently  satisfactory  method  of  dis- 
tributing general  expense  is  what  might  be  termed  an  ap- 
portionment by  inspection :  That  is,  we  take  our  principal 
classes  of  product  which  in  one  line  of  business  might  be 
bank  vaults,  safes,  and  steel  furniture,  or  in  another  line  of 
business  might  be  chain  blocks,  locks,  and  architectural  iron 
work.  We  next  take  our  principal  general-expense  ac- 
counts, which  may  be  correspondence,  catalogues,  general 
advertising,  salesmen's  salaries  or  commissions,  and  travel- 
ing expenses.  We  decide  from  the  general  characteristics 
and  circumstances  what  proportion  of  each  of  these  accounts 
is  fairly  chargeable  to  each  line  of  product.  And  finally  we 
reduce  the  resultant  totals  to  a  percentage  basis.  This  is  not 
a  scientific  mode  of  solution.  No  mode  of  scientific  solu- 
tion is  possible.  The  element  of  judgment  enters  largely 
into  our  analysis  and  distribution  of  the  various  accounts  — 
but,  as  Mr.  Church  says,  "  there  is  a  great  difference  between 
judgment  and  mere  guesswork,"  and  by  taking  the  various 
items  of  expense  in  detail  we  arrive  at  a  result  immensely 
more  valuable  than  any  that  could  be  reached  by  guessing  at 
the  whole  lump  of  expense. 

The  expense  accounts  we  have  been  discussing,  although 
they  appeared  to  be  indirectly  connected  with  individual 
units  of  product,  nevertheless  have  been  actual  accounts, 
sums  of  money  positively  and  visibly  expended.  There  is, 
however,  another  element  in  the  cost  of  manufacture  closely 
associated  with  expense  (so  closely  that  I  have  not  hereto- 
fore referred  to  it)  and  yet  characterized  by  qualities  quite 
distinctively  its  own  —  qualities  which  differentiate  it  from 
expense  and  suggest  the  need  of  a  different  mode  of  treat- 
ment. This  last  element  of  cost  is  depreciation.  Deprecia- 
tion is  the  decrease  in  value  of  our  property,  that  is,  espe- 
cially our  buildings,  machinery,  and  equipment,  by  the  fact 


DISTRIBUTION    OF    EXPENSE  107 

that  it  is  growing  older  and  is  drawing  nearer  the  time  when 
it  will  be  worn  out,  or  when  through  some  change  of  condi- 
tions, processes  or  methods  it  will  become  obsolete,  and  will 
have  to  be  discarded,  scrapped  and  replaced  by  something 
new.  We  must  therefore  anticipate  this  inevitable  depreci- 
ation by  estimating  in  our  costs,  and  recovering  from  our 
sales,  a  reserve  fund,  thus  accumulating  in  advance  a  fund 
from  which  the  depreciated  equipment  may  be  replaced. 
Our  cost  must  include  not  only  the  material  and  the  labor 
that  have  actually  gone  into  the  product,  plus  a  share  of  the 
expense  burden  actually  incurred.  It  must  include  further 
a  factor  for  something  that  has  not  yet  happened,  or  at  least 
has  not  yet  materialized  in  the  form  of  an  expenditure  in- 
curred and  recorded  on  our  books.  We  must  provide  for 
the  depreciation  which  is  going  on  day  by  day,  even  though 
it  may  not  make  itself  evident  for  a  long  time  to  come,  or 
until  the  wear  and  tear  have  grown  serious  enough  to  re- 
quire overhauling  or  replacing  of  the  depreciated  item. 

In  reckoning  the  allowance  to  be  made  for  depreciation, 
we  have  not  only  the  same  difficulties  that  we  have  in  the  case 
of  expense,- — that  is,  the  difficulty  of  apportioning  an  indi- 
rect account  to  direct  classes  or  items  of  product  —  but  we 
have  the  additional  problem  of  determining  what  amount  we 
must  thus  apportion. 

We  have  seen  that  authorities  differ  in  their  treatment  of 
the  expense  account.  They  differ  more  widely  and  aggres- 
sively yet  over  depreciation.  Some  treat  it  rather  curtly,  al- 
most with  indifference,  maintaining  that  where  repairs  and 
renewals  are  consistently  kept  up,  depreciation  need  be  rec- 
ognized only  by  comparison  of  annual  inventories  and  the 
use  of  such  averaged  figures  as  may  be  thus  disclosed.  At 
the  other  extreme,  some  accountants  argue  fiercely  that  de- 
preciation should  be  assumed  at  an  arbitrary  percentage  of 
the  value  of  our  equipment,  and  they  split  hairs  in  the  debate 
whether  this  percentage  should  be  taken  always  on  the  orig- 


IO8  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

inal  investment,  or  each  succeeding  year  on  the  investment 
as  reduced  by  preceding  deductions.1 

It  is  a  proposition  upon  which  it  is  perhaps  impossible  to 
generalize  except  perhaps  to  this  extent: 

First,  that  it  is  very  dangerous  to  regard  investment  in 
short-lived  equipment  (such  as  small  tools,  for  example)  as 
a  plant  account  —  a  part  of  our  fixed  capital  —  at  all;  it 
should  be  considered  an  expense  and  so  charged  at  once,  or 
if  carried  as  an  asset  should  be  given  only  a  nominal  value. 

Second,  that  items  of  intermediate  permanency  such  as 
drawings,  patterns,  should  be  credited  as  an  asset  only  at  a 
fraction  of  the  cost  and  a  very  high  factor  of  depreciation 
should  be  applied  to  them  year  by  year  until  they  are 
charged  off  and  disappear. 

Third,  that  as  to  the  permanent  items  such  as  machinery, 
apparatus,  power-plant,  heavy  tools,  structures,  etc.,  the 
chief  danger  to  the  continuance  of  their  value  is  not  so  much 
that  they  may  be  destroyed  by  wear  and  tear  as  that  they 
may  be  superseded  by  some  new  and  radical  development. 
Suppose  we  are  building  large  reciprocating  steam  engines: 
Our  costly  drawings,  patterns,  templates  and  equipment  for 
a  great  horizontal  and  vertical  compound  type  may  be  made 
obsolete  in  a  year  or  two  by  the  introduction  of  the  steam 
turbine.  Suppose  we  are  operating  a  cable-road:  our 
power-plant  may  have  to  be  scrapped  to  put  in  electric  trac- 
tion. Suppose  we  own  a  bicycle  factory:  it  may  be  thrown 
into  idleness  because  the  popular  whim  turns  to  tennis  and 
golf.  Suppose  we  are  prosperous  manufacturers  of  tin- 
plates  in  Wales:  our  mills  may  be  closed  by  the  Dingley 
tariff  in  the  United  States.  Suppose  we  are  proprietors  of 
a  machine-shop :  it  may  have  to  be  remodelled  throughout 
and  largely  re-equipped  for  electric  driving  and  the  use  of 
high-speed  steel.  In  some  of  these  cases,  even,  it  might  be 

1  A  standard  work  on  depreciation  is  "  The  Depreciation  of  Factories, 
and  their  Valuation,"  by  Ewing  Matheson;  E.  &  F.  N.  Spon. 


DISTRIBUTION    OF    EXPENSE  109 

argued  that  the  renewal  expense  should  not  be  charged 
against  the  profits  of  the  past  as  a  depreciation,  but  rather 
as  a  new  investment  justified  by  the  larger  profits  obtain- 
able in  the  future  through  the  improvement.  Others  might 
be  held  to  be  "  risks  of  the  business  "  rather  than  cases  of 
depreciation.  If  we  are  to  provide  for  such  contingencies 
by  a  factor  of  depreciation,  depreciation  becomes  to  a  cer- 
tain extent  a  sort  of  insurance  against  an  indeterminable 
risk.  It  is  prudent  to  provide  for  it;  to  consider  that  cer- 
tain future  expense  not  yet  visible  is  yet  inevitable;  to  assess 
a  provision  for  it  as  a  part  of  our  calculated  costs,  and  to 
set  aside  a  corresponding  share  of  our  current  receipts  as  a 
reserve  fund  to  meet  the  contingency.  But  what  the  factor 
should  be  in  any  given  case  I  think  can  be  determined  only 
by  the  method  of  inspection  and  the  exercise  of  deliberate 
and  intelligent  common-sense. 

There  is,  however,  a  certain  ethical  consideration,  as 
pointed  out  by  Prof.  L.  S.  Randolph,1  which  should  not  be 
overlooked  when  a  rate  of  allowance  for  depreciation  is  de- 
termined. It  is  this:  In  industrial  and  corporate  undertak- 
ings generally  there  are  usually  at  least  two  classes  of  owner- 
ship interests,  typically  represented  by  the  bondholder  and 
the  stockholder.  The  bondholder  lends  capital  on  the  se- 
curity of  the  actual  physical  property.  In  view  of  this 
security  he  lends  the  money  at  a  comparatively  low  rate  of 
interest,  looking  to  this  physical  property  for  the  ultimate 
return  of  his  principal.  The  stockholder  seeks  his  return 
from  the  profits  of  the  business  and  generally  expects  to  re- 
ceive a  higher  rate  of  interest.  He  owns  the  business,  sub- 
ject only  to  the  lien  given  to  the  bondholders  for  the  bor- 
rowed capital.  He  manages  the  business.  Its  success  is 
proportionate  to  his  skill  and  ability  and  all  surplus  earn- 
ings accrue  to  him. 

Now   if  in   calculating   and   distributing   his   profits   the 
1  The  Engineering  Magazine,  August,  1910. 


110  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

stockholder  does  not  make  proper  provision  for  restoring 
wear  and  tear,  replacing  worn-out  equipment,  and  main- 
taining the  value  of  the  plant,  which  is  the  bondholder's  se- 
curity, he  is  not  keeping  up  the  value  that  he  has  pledged 
against  the  money  borrowed  from  the  bondholders.  He  is 
not  dealing  fairly  with  his  creditors. 

If,  on  the  other  hand,  the  stockholder  set  aside  an  un- 
necessarily large  proportion  of  his  gross  earnings  for  a  de- 
preciation fund,  thereby  diminishing  his  apparent  net  profits 
or  his  surplus  available  for  dividends,  this  fund  nevertheless 
remains  in  his  hands  for  administration  and  need  be  drawn 
upon  only  so  far  as  actual  depreciation  occurs,  the  remain- 
der reverting  to  the  stockholder,  so  that  he  does  himself  no 
wrong.  This  is,  in  other  words,  an  argument  for  a  high 
rather  than  a  low  depreciation  allowance. 

Clearly,  the  distribution  we  have  been  talking  of  is  all 
retrospective.  It  shows  us  the  dollars  and  cents  of  what  we 
have  done.  This  is  very  important,  but  it  is  even  more  im- 
portant to  know  what  we  can  do  in  the  future.  In  other 
words,  the  gift  of  prophecy  is  often  more  valuable 
than  the  knowledge  of  history.  Therefore  the  chief 
object  of  putting  history  into  this  form  is  to  make 
it  effective  for  prophecy  —  that  is,  for  determining  the 
cost  of  new  product,  estimating  the  cost  of  new  work, 
and  directing  the  expansion  of  business  along  the  most 
profitable  channels.  And  beyond  that,  figures  of  cost  in- 
telligently prepared  and  analyzed  serve  as  true  guides  show- 
ing exactly  where  our  losses,  wastes,  and  inefficiencies  occur, 
revealing  changes  or  irregularities  requiring  investigation, 
and  calling  as  loudly  as  figures  can  call  for  the  reforms  and 
economies  that  will  make  our  output  larger,  better,  or  lower 
in  cost  of  production.  The  real  purpose  of  cost  finding  is 
cost  reduction. 


LABOR.     THE  PRIMARY  WAGE  SYSTEMS 


CHAPTER  VII 
LABOR.    THE  PRIMARY  WAGE  SYSTEMS 

LABOR  represents  the  most  interesting,  the  most  diffi- 
cult, and  probably  the  best  studied  part  of  works  man- 
agement —  and  yet  the  part  which  is  furthest  from  finality. 
This  is  because  it  has  to  deal  not  with  a  pas- 
sive "  party  of  the  second  part,"  such  as  we  have 
to  consider  in  material  and  machinery,  but  with  human 
ambitions,  hopes,  fears,  and  prejudices  —  in  short;  with 
"  the  other  fellow.'1  Until  the  race  reaches  the  end  of  its 
evolution  we  shall  never  reach  the  end  of  the  labor  problem. 
Labor  may  of  itself  be  the  largest  element  entering  into 
manufacturing  costs,  and  therefore  may  deserve  per  se  the 
largest  measure  of  attention  because  of  its  intrinsic  impor- 
tance; but  even  when  it  is  relatively  one  of  the  smaller  fac- 
tors in  the  equation,  it  may  have  immense  potentiality  in  af- 
fecting the  values  of  the  others  which  appear  intrinsically 
larger.  It  may,  so  to  speak,  be  not  a  separate  quantity  in 
the  equation,  prefixed  by  a  plus  or  minus  sign,  but  a  co-effi- 
cient or  even  an  exponent,  affecting  the  value  of  an  intrin- 
sically much  larger  quantity.  A  man  whose  wages  are  30 
cents  an  hour  may  control  the  operation  of  a  machine 
which,  for  interest  on  its  first  cost,  maintenance,  depreciation, 
floor  space,  and  stand-by  losses,  represents  a  fixed  charge  of 
$3  an  hour.  If  the  man  is  slow  in  his  movements,  and  takes 
an  hour  and  a  half  to  do  a  job  which  he  should  finish  in  an 
hour,  the  important  loss  is  not  the  15  cents  in  wages  for  the 
man's  time,  but  the  $1.50  for  the  machine's  time.  If  his 
work  is  badly  laid  out  so  that  he  waits  15  minutes  between 
jobs,  the  important  loss  is  not  the  7^  cents  paid  him  for  his 


114  PRINCIPLES   OF   INDUSTRIAL    ENGINEERING 

time  of  idleness,  but  the  75  cents  loss  through  the  idleness 
of  the  machine.  Or,  again,  the  $3  a  day  man  may  work  half 
a  day  on  a  piece  worth  $15  and  by  carelessness  or  incom- 
petency  may  spoil  the  job.  The  important  loss  is  not  the 
$1.50  paid  in  wages  for  which  we  get  no  return,  but  the  $15 
for  the  material  destr9yed.  In  many  classes  of  manufacture 
the  investment  in  general  plant  and  mechanical  equipment, 
and  the  fixed  charges  for  power  and  transmission,  main- 
tenance, superintendence,  management,  etc.,  make  what  is 
called  the  "  overhead  burden  "  a  larger  tax  than  the  pay- 
roll; in  such  a  case  it  may  be  a  wise  policy  to  stimulate  pro- 
duction by  an  increase  in  wages  more  than  proportionate  to 
the  increase  of  output,  because  we  shall  recoup  our  extra 
wages  expense  by  the  reduction  of  the  burden  resting  upon 
each  unit  or  product.  To  be  more  specific:  Suppose  we 
are  turning  out  100  machines  a  day,  our  daily  labor  bill  be- 
ing $500,  the  cost  of  our  material  another  $500,  and  our 
general  expense  $1,500  per  day.  The  cost  of  each  machine 
is  then  500  plus  500  plus  $1,500,  divided  by  100,  equals  $25. 
Suppose  next,  by  doubling  their  wages  we  can  spur  our  men 
on  to  such  zeal  that  they  turn  out  150  machines  a  day.  We 
are  paying  100  per  cent  more  for  labor  and  getting  only  50 
per  cent  more  product.  Nevertheless,  our  total  cost  of 
$1,000  for  labor,  $750  for  material,  plus  $1,500  for  fixed 
expense,  equals  but  $3,250,  and  when  this  is  divided  up 
among  150  machines  the  cost  of  each  is  shown  to  be  only 
$21.67.  We  have  reduced  our  total  manufacturing  cost 
$3-33  °n  each  unit,  or  about  i2l/2  per  cent.  And,  in  addi- 
tion, by  the  increased  output  we  have  secured  another  ad- 
vantage; that  is,  the  more  rapid  turnover  of  our  invested 
capital. 

The  general  principle  involved  is  this:  Material  cost  and 
labor  cost  per  unit  of  product  naturally  vary  directly  with 
the  number  of  units  we  manufacture;  but  expense  costs  are, 
in  a  very  large  proportion  at  least,  invariable.  They  remain 


PRIMARY    WAGE    SYSTEMS  115 

just  the  same  whether  the  amount  of  product  we  turn  out  is 
large  or  small.  If  we  turn  out  but  few  units  the  expense 
cost  of  each,  therefore,  becomes  great.  If  we  turn  out  a 
great  many  units  the  expense  cost  of  each  becomes  very 
small.  We  can  therefore  often,  and  indeed  almost  always, 
well  afford  to  increase  the  wages  cost  per  unit,  if  by  so  doing 
we  can  stimulate  the  workers  to  turn  out  a  large  volume  of 
work  and  so  cut  down  the  expense  cost  per  unit.  The  sav- 
ing in  expense  cost  compensates  the  manufacturer  for  the  in- 
crease of  wages  cost.  The  increase  of  wages  compensates 
the  workman  for  his  extra  effort.  This  is  the  fundamental 
idea  underlying  the  advanced  wage  systems.  It  is  quite 
simple,  but  failure  to  understand  it  and  realize  its  impor- 
tance has  been  the  cause  of  most  of  the  resistance  to  the  intro- 
duction of  these  systems  and  to  many  of  the  labor  troubles 
between  employers  and  employees. 

At  the  root  of  the  whole  thing,  as  already  pointed  out, 
is  the  fact  that  the  enormous  expansion  of  the  manufacturing 
system  made  it  difficult  to  maintain  individual  relations  be- 
tween the  employer  and  the  individual  workman.  The 
conditions  were  defined  somewhat  fully  in  the  second  chapter 
but  the  argument  may  be  summarized  again  here.  There 
was  first  the  mere  difficulty  of  numbers  —  the  collection  of 
hundreds  and  thousands  of  men  in  one  establishment  or  one 
organization;  the  identity  of  the  workman  and  the  effi- 
ciency of  his  work  was  lost  sight  of  in  the  crowd.  There 
was  next  the  tendency  to  specialization,  under  which  the  in- 
dividual worker  seldom  turns  out  any  complete  article,  but 
only  performs  some  part  of  the  process  or  operation,  pass- 
ing the  work  on  then  to  the  next  specialist,  who  performs 
the  next  operation,  so  that  it  becomes  still  more  difficult  to 
pick  out  and  identify  the  work  of  any  one  man.  Thirdly, 
there  is  the  tendency  to  standardization,  under  which  the 
individual  worker  does  not  put  much  of  his  own  thought  or 
his  own  skill  into  the  job,  but  simply  repeats  mechanically  a 


Il6  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

routine  marked  out  by  the  patterns  or  the  more  or  less  auto- 
matic machines  and  the  detailed  instructions  provided  for 
him  by  the  thought  of  somebody  else.  The  almost  over- 
powering influence  of  these  tendencies  is  to  weld  workmen 
into  classes  and  to  substitute  dealing  with  a  class  for  dealing 
with  an  individual.  And  when  this  happens  without  the  bal- 
ancing influence  of  any  other  principle,  the  next  inevitable 
step  is  that  the  inducement  to  individual  efficiency  disap- 
pears. Under  ordinary  conditions  it  is  a  very  small  and 
very  uncertain  profit  for  a  workman  at  the  bench,  in  the 
ditch,  on  the  wall,  to  work  harder  and  better  than  his 
fellows.  He  is  not  noticed  and  he  gets  no  reward.  There- 
fore, as  Mr.  Gantt  has  so  ably  pointed  out,1  the  next  nec- 
essary consequence  is  that  the  man  of  more  than  usual  abil- 
ity, finding  that  he  can  not  make  anything  by  putting  that 
ability  into  his  work,  turns  his  ability  to  agitation.  He  sees 
that  he  is  treated  as  a  member  of  a  class  and  can  get  no  more 
than  the  ruling  wages  paid  to  that  class;  so  he  endeavors  to 
enlist  the  whole  class  in  getting  those  ruling  wages  raised. 
Trade  unions  have  been  occupied  chiefly  with  efforts  to  raise 
wages  or  to  shorten  hours  because  it  was  only  by  united 
action  that  the  individuals  composing  the  union  could  get 
more.  If  the  scheme  of  employment  and  payment  for  work 
done  were  so  adjusted  that  a  good  worker  would  automatic- 
ally be  singled  out,  rated  according  to  his  performance,  and 
paid  according  to  his  ability,  the  energetic  workers  would  be 
much  less  interested  in  strikes  for  higher  wages  regardless  of 
efficiency.  The  trade  unions  would  not  go  out  of  existence 
by  any  means,  but  they  would  find  other  and,  as  it  would 
eventually  prove,  economically  better  matters  to  which  to 
turn  their  attention. 

The  advanced  wage  systems  are  all  efforts,  earnest  and 
conscientious   efforts,   to   provide   a   natural   and   automatic 
means  for  paying  the  able  workman  in  accordance  with  his 
1  Work,  Wages  and   Profits.     The  Engineering  Magazine. 


PRIMARY    WAGE    SYSTEMS  117 

ability,  while  they  protect  the  less  efficient  workman  in  at 
least  the  standard  wages  of  his  class.  That  is,  they  do  not 
undertake  altogether  to  break  up  the  class  system,  but  to 
enable  any  man  who  is  superior  to  the  average  to  rise  above 
it.  They  are  all  based  upon  some  sort  of  a  combination  of 
two  elementary  ideas  of  paying  men  for  services  rendered. 
These  two  ideas  are  day  pay  and  piece  rate.  Fundamen- 
tally, these  are  the  only  two  methods  of  wage  payment. 

Under  day  pay  a  man  is  paid  for  the  length  of  time  he 
works,  regardless  of  the  amount  of  work  he  may  do  during 
that  time. 

Under  piece  rates  the  man  is  paid  for  the  amount  of 
work  he  does,  regardless  of  the  time  it  takes  him  to  do  it. 

If  I  hire  a  man  to  shovel  sand  at  $1.50  for  ten  hours,  that 
is  day  pay.  If  I  hire  him  to  put  a  load  of  coal  into  my  cel- 
lar at  15  cents  a  ton,  that  is  piece  rate.  If  I  hire  a  stone 
mason  at  $4  a  day  for  eight  hours,  that  is  day  pay.  If  I 
agree  with  him  to  build  me  a  wall  at  $1.25  a  perch,  that  is 
piece  rate.  Under  the  one  system  you  pay  a  man  according 
to  the  length  of  time  he  is  in  your  employment,  and  under 
the  other  system  you  pay  according  to  the  amount  he  does 
for  you.  In  the  bonus  system,  the  premium  system,  the 
efficiency  system,  and  all  the  others  which  we  shall  shortly 
take  up  in  detail,  these  two  elementary  ideas  are  somehow 
blended;  but  blending  ideas  is  something  like  blending  col- 
ors; the  result  is  not  like  either  of  the  elementary  colors  you 
started  with,  and  mixtures  of  the  same  two  colors  in  differ- 
ent proportions  are  unlike  one  another.  So  each  of  the  va- 
rious wage  systems  has  its  own  individual  color,  so  to  speak; 
and  as  certain  colors  are  pleasing  to  some  eyes  and  other 
colors  pleasing  to  other  eyes,  so  certain  wage  systems  are 
pleasing  to  certain  minds  and  others  more  pleasing  to  other 
minds. 

Let  us  now  take  up  the  several  wage  systems  in  order,  be- 
ginning with  that  which  is  probably  the  oldest,  if  indeed  it 


Il8  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

was  not  originally  the  only,  method  of  paying  for  labor. 
This  is  the  method  of  day  pay.  It  is  indeed  so  old  and  so 
deep-rooted  that  one  is  almost  tempted  to  say  that  if  we  go 
back  to  the  source  of  things  it  is  the  only  wage  method;  for 
when  piece  rates  are  fixed  you  will  always  find  that,  con- 
sciously or  unconsciously,  the  employer  and  the  workman 
both  compare  in  their  minds  the  piece  rate  proposed  with  the 
time  they  think  the  job  is  going  to  take,  so  that  it  seems  to 
come  down,  after  all,  to  the  question  not  what  is  the  job 
worth,  but  what  is  the  time  that  it  takes  to  do  the  job  worth? 
Now  the  conception  underlying  day  pay  is  that  a  certain 
sum  of  money  is  arithmetically  equal  to  a  certain  number  of 
hours  spent  by  a  man  —  any  man  —  at  doing  a  certain  kind 
of  work.  For  example,  every  man  digging  dirt  is  worth 
$1.50  for  ten  hours'  labor;  every  man  laying  brick  is  worth 
$5  for  eight  hours'  labor.  Stated  this  way,  baldly  and  with- 
out qualification,  the  notion  seems  so  foolish  that  it  is  hard 
to  see  how  it  ever  became  so  generally  adopted  in  practice. 
It  would  be  as  intelligent  to  base  an  economic  system  on  the 
hypothesis  that  a  string  is  always  6  feet  long  or  that  all 
horses  run  equally  fast.  Nevertheless,  the  conception  per- 
sists, and  will  long  continue  to  persist,  and  you  will  have  to 
deal  with  it.  It  is  in  the  moral  code  of  many  labor  unions  as 
the  first  and  great  commandment.  The  reason,  as  already 
suggested,  is  that  the  unions  have  found  it  necessary  to  re- 
sort to  collective  bargaining  and  to  demand  a  universal  wage 
rate,  chiefly  because  there  has  been  in  general  no  method 
practiced  by  employers  for  fair  and  honest  individual  bar- 
gaining with  each  man  according  to  his  ability.  The  result 
of  the  whole  thing  is  a  struggle  between  opposing  forces, 
the  employer  trying  to  push  the  day  wage  down  because  he 
has  no  satisfactory  assurance  of  anything  but  minimum  effi- 
ciency on  the  part  of  his  workmen,  and  therefore  he  wants 
to  pay  the  minimum  price;  and  the  men  trying  to  force  the 
rate  up  because  they  can  not  get  it  up  in  any  way  except  by 


PRIMARY    WAGE    SYSTEMS  1 19 

force.  This  sort  of  struggle  is  constantly  going  on,  with 
variable  results.  Where  labor  is  abundant  or  poorly  organ- 
ized, and  where  the  employer  or  sub-bosses  have  a  genius 
for  driving,  probably  as  highly  efficient  results  are  secured 
under  the  day-wage  plan  as  under  any  other ;  that  is,  the  em- 
ployer gets  as  high  a  product  for  the  dollar  he  expends  as  he 
can  get  by  any  method.  Where  labor  is  powerful  and  well 
organized  and  much  in  demand,  the  results  secured  under  the 
day-wage  system  are  perhaps  as  inefficient,  and  as  little  re- 
turn is  obtained  for  each  dollar  expended,  as  in  any  applica- 
tion of  capital  to  productive  or  constructive  work,  except, 
perhaps,  in  deliberately  dishonest  political  jobs. 

Nevertheless,  the  day  wage  remains  to-day  the  method  of 
payment  for  a  very  large  proportion,  perhaps  a  large  ma- 
jority, of  all  service.  I  have  dwelt  strongly  upon  its  un- 
favorable features,  but  of  course  they  are  to  a  certain  extent, 
even  if  imperfectly,  remedied  in  practice.  The  extremely 
good  man  cannot  be  held  down,  and  he  will  break  through 
even  the  dead  level  of  day  pay ;  so  the  fallacy  of  assuming  that 
all  men  are  equally  worth  $1.50  a  day  is  corrected  fractionally 
by  picking  out  here  and  there  a  peculiarly  able  man  and  mak- 
ing him  a  job  boss  or  a  sub-foreman  at  $2  or  $2.50,  while 
the  hopelessly  incapable  fellow  is  fired  off  the  job  and  gets  no 
wages  at  all.  The  plan  as  a  whole  is  one  of  those  rough 
and  ready  ones  that  the  world  has  always  used  and  always 
will  use.  And  k  does  express,  although  it  expresses  it  badly, 
a  certain  vital  truth;  that  is,  that  time,  after  all,  is  the  one 
supreme  value  that  must  be  seized  and  used  moment  by  mo- 
ment or  it  is  lost  forever.  If  machinery  is  idle  the  oppor- 
tunity may  usefully  be  taken  to  overhaul  and  repair  it;  if 
material  is  idle  it  may  be  worked  over  into  something  else 
which  is  active;  if  dollars  are  idle  they  are  only  dormant  and 
will  come  to  life  and  into  circulation  as  soon  as  there  is  an 
opportunity.  But  if  hours  are  idle  they  are  dead  and  gone 
forever.  This  truth  of  the  fundamental  value  of  time  is 


120  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

recognized  by  the  day-pay  system.  You  will  find  the  system 
in  use  everywhere  and  you  will  have  to  get  along  with  it; 
nevertheless,  in  most  cases  a  much  more  intelligent  plan  for 
hiring  time  than  the  day-wages  plan  can  be  devised  and  may 
be  applicable. 

Perhaps  the  first  deliberate  effort  in  this  direction  was  the 
establishment  of  piece  rates  in  place  of  day  pay.  By  these 
rates  the  unit  of  adjustment  as  between  employer  and  em- 
ployee is  not  so  much  time  spent  at  labor,  but  so  much  work 
completed.  The  unit  task  may  be  of  the  most  diverse  kind 
in  different  occupations  —  a  ton  of  coal  mined,  a  locomotive 
mile  run,  a  yard  of  cloth  woven,  a  casting  made,  a  certain 
area  of  type  set,  a  face  shaved  or  a  head  of  hair  cut.  The 
fundamental  idea  of  day  pay  is  that  of  mathematical  equiva- 
lence between  money  and  time;  the  fundamental  idea  of  piece 
work  is  that  of  mathematical  equivalence  between  money  and 
jobs. 

If,  for  example,  I  am  working  as  a  journeyman  hat- 
maker  1  at  day  wages,  I  tacitly  accept  the  truth  of  the 
proposition  that  ten  hours  of  my  time  are  worth,  say,  $2. 
That  is,  I  agree  with  my  employer  upon  the  truth  of  this 
equation : 

(A)      10  hours  time=$2.oo 

I  come  into  the  shop  at  7,  go  home  at  6,  with  an  hour  for 
lunch.  I  loaf  as  much  as  I  dare;  the  boss  watches  me  and 
drives  me  as  much  as  he  can,  and  perhaps  in  the  average  I 
make  about  one  hat  a  day.  Now  suppose  I  go  on  to  piece 
work.  I  set  in  the  background  the  proposition  "  ten  hours 
equals  $2,"  and  base  my  creed  on  the  tenet  that  u  making  one 
hat  equals  $2."  In  other  words,  my  employer  and  I  fix 
our  eyes  on  a  new  equation : 

(B)      Making  one  hat=$2.oo 

1  It  is  scarcely  necessary  to  say  that  the  supposition  is  taken  at  ran- 
dom, for  illustration  only,  and  does  not  in  the  least  reflect  actual  con- 
ditions in  the  hat-making  industry. 


PRIMARY   WAGE    SYSTEMS  121 

The  longer  I  dawdle,  the  longer  it  takes  me  to  get  that 
$2.  On  the  other  hand,  if  I  work  fast  I  can  perhaps  get 
through  by  mid-afternoon  or  even  earlier  and  go  fishing. 
Or  if  I  choose  to  stay  I  can  begin  on  another  hat.  Very 
possibly  by  diligence  and  study  I  can  improve  the  tools  or 
the  operations  a  little,  or  I  may  carry  on  the  making  of  two 
hats  at  once,  working  on  each  during  necessary  pauses  for 
the  maturing  of  processes  on  the  other ;  and  I  may  soon  be 
turning  out  three  hats  in  two  days  or  even  two  hats  in  one 
day.  The  boss  will  be  paying  me  50  per  cent  to  100  per 
cent  more  wages  in  a  given  time  than  he  did  formerly.  Yet 
his  hats  are  costing  him  no  more.  Indeed,  they  are  costing 
him  less,  for  his  general  expenses  for  shop  rent,  light,  heat, 
superintendence  (that  "  overhead  burden "  of  which  we 
have  already  spoken)  are  no  greater  than  they  were  before, 
and  yet  he  is  turning  out  more  hats  to  absorb  these  charges. 
A  smaller  fraction  of  this  cost,  therefore,  attaches  to  each 
hat. 

Now  I  said  that  in  going  on  to  piece  rates  the  boss  and  I 
both  set  in  the  background  the  proposition  that  ten  hours 
equal  $2.  I  used  those  particular  words  advisedly,  be- 
cause that  idea  at  best  is  only  retired.  It  is  not  dismissed. 
It  lurks  in  the  background  of  our  minds  persistently.  The 
price  of  $2  per  hat  was  fixed  as  a  piece  rate  not  because  we 
really  believed  it  was  worth  $2  to  make  a  hat,  but  because 
on  the  average  that  paid  me  $2  for  a  day's  time.  In  other 
words,  we  accepted  formula  (B)  not  because  we  believed 
in  its  abstract  truth,  but  because  we  believed  this : 

(C)      Making  one  hat=io  hours  time. 

As  soon  as  (C)  proves  untrue,  (B)  no  longer  follows 
from  (A)  and  my  employer  at  least  loses  faith  in  it.  When 
I  begin  to  get  $3  a  day  the  boss  begins  to  get  uneasy,  and 
when  I  make  $4  a  day  he  is  probably  certain  that  some- 
thing is  wrong.  He  believes  no  journeyman's  time  is  worth 


122  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

$4  a  day.  The  fact  that  he  is  turning  out  larger  product 
from  his  shop  in  the  same  time  at  less  cost  does  not  impress 
him  as  it  should,  while  the  $4  a  day  to  a  "  $2  man  "  looks 
enormous.  He  begins  to  believe  that  he  is  paying  too 
much  for  the  making  of  a  hat.  Probably  he  decides  that 
if  two  hats  can  be  made  in  one  day,  the  making  of  a  hat 
is  not  worth  more  than  $i,  and  he  cuts  my  piece  rate  in 
half.  I  have  to  work  twice  as  hard  as  I  did  before  and 
get  no  more  for  it.  On  the  other  side,  my  fellow  workmen 
are  displeased.  They  are  contented  with  the  old  order  and 
want  to  work  along  turning  out  about  one  hat  a  day  and 
getting  $2  for  the  day's  time.  They  say  "  if  you  show 
the  boss  that  two  hats  can  be  made  in  a  day,  he  will  think 
that  we  are  all  a  worthless  lazy  lot,  and  he  will  want  to 
drive  us  up  to  your  pitch  or  get  rid  of  us.  You  are  killing 
the  job."  So  these  two  influences  combine  to  discourage 
me  against  the  great  and  apparently  fortunate  incentive 
which  first  led  me  to  rejoice  in  the  piece  rate  and  to  see  so 
much  apparent  advantage  in  it. 

Piece-rate  payment  is  an  old  idea.  We  find  it  far  back 
in  the  history  of  the  guilds,  and  no  doubt  it  existed  centuries 
before  that.  Within  comparatively  recent  times,  however, 
it  has  been  brought  into  new  prominence  through  the  earnest 
efforts  of  men  who  saw  in  it  a  great  light  to  lighten  the 
way  out  of  the  darkness  of  day  wages.  It  offered  an  in- 
centive to  the  worker,  a  reward  proportioned  to  his  skill 
and  industry,  an  enlarged  output  induced  by  this  financially- 
stimulated  activity,  and  the  very  essential  result  of  increased 
volume  of  manufacture  with  decreased  cost  of  product  from 
the  same  plant  investment.  Results  —  important  results 
—  have  been  secured;  but  yet  they  have  frequently  been 
disappointingly  below  expectations,  chiefly  for  the  reasons 
suggested  in  my  little  parable  of  the  hat-maker. 

The  great  inherent  trouble  is  the  difficulty  (under  ordi- 
nary or  non-scientific  management)  of  fixing  piece  prices 


PRIMARY    WAGE    SYSTEMS  123 

which  are  fair  and  which  continue  to  be  fair.  The  reserve 
capacity  which  a  workman  may  be  holding  back,  consciously 
or  unconsciously,  in  an  operation  that  has  not  been  scien- 
tifically studied  and  standardized,  is  almost  unforetellable. 
When  it  is  realized  under  the  incentive  of  piece  payment, 
and  his  earnings  rise  enormously,  the  disposition  of  the 
wage  payer  to  rebel  against  the  outlay  and  to  cut  down 
the  piece  price  is  almost  irresistible.  If  the  employer  sees 
that  a  workman  can  do  several  times  as  much  as  he  was 
doing  under  day  wages,  you  can  hardly  blame  him  for  feel- 
ing that  he  has  been  defrauded  all  along  under  the  old 
system,  and  for  trying  to  make  things  more  even  from  his 
point  of  view.  But  the  price-cutting  that  has  so  very,  very 
often  followed  soon  after  unscientific  price-setting  has 
worked  immense  mischief,  by  raising  in  the  minds  of  the 
men  suspicion  and  distrust  of  systems  introduced  to  replace 
the  old  day-wage  plan.  Union  opposition  has  been  strong 
against  piece  rates,  and  while  it  has  been  modified  in  many 
places  so  as  to  admit  piece  work,  this  acceptance  has  often 
been  accompanied  by  counter-restrictions  which  nullify  most 
of  the  possible  advantage  —  as,  for  example,  the  fixation  of 
a  very  moderate  number  of  pieces  as  the  maximum  that 
any  man  may  make  in  a  day,  thereby  coming  back  substan- 
tially to  day  wages. 

The  trouble  here,  however,  is  not  so  much  one  of  principle 
as  one  of  administration;  but  there  is  a  fault  of  principle 
inherent  in  piece  rates,  and  that  is  that  they  put  all  the 
uncertainties  of  production  on  the  workmen.  Suppose  a 
man  is  machining  steel  castings  at  so  much  per  piece.  He 
may  have  delivered  to  him  a  lot  of  hard  metal  parts  that 
take  four  or  five  times  the  expected  time  to  finish.  For 
that  period,  at  least,  he  can  not  make  living  wages.  Sup- 
pose a  gang  is  unloading  coal  cars  at  so  much  per  ton,  and 
the  switching  crew  is  tardy  in  moving  away  empties  and 
setting  in  loaded  cars,  and  so  keeps  them  idle  for  consider- 


124  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

able  periods,  or  suppose  that  in  setting  in  the  new  cars 
it  places  them  badly  so  that  the  men  have  an  extra  long 
throw  and  work  at  a  disadvantage.  Again,  the  workmen 
may  be  unable  to  make  fair  wages,  through  no  fault  of  their 
own.  Suppose,  once  more,  a  working  gang  is  made  up  by 
the  foreman  so  that  green  men  are  mixed  with  skilled,  and 
these  green  men  by  their  awkwardness  cut  down  the  out- 
put of  the  whole  gang.  Here,  again,  if  they  are  working 
at  piece  rates,  their  earnings  are  reduced  without  their  fault. 

In  all  such  cases,  unless  there  is  special  intervention  by 
someone  in  authority  to  make  up  the  loss,  it  falls  upon  the 
piece-rate  worker.  Under  day  pay,  of  course,  it  would  be 
the  employer  who  would  suffer  in  such  cases;  but  the  em- 
ployer is  in  the  first  place  better  able  to  stand  the  loss.  The 
unprofitable  item  of  work  is  probably  only  one  of  many 
he  has  in  hand,  while  to  the  workman  it  is  the  worker's 
entire  interest;  and  last,  and  most  important,  the  whole 
power  to  remove  the  conditions  that  caused  the  loss  rested 
with  the  employer  and  not  with  the  workman. 

Notwithstanding  these  certain  defects  of  principle  and 
administration,  however,  piece  rates  are  a  good  deal  used. 
Where  the  rates  are  carefully  and  fairly  set,  by  fair  and 
frank  effort  on  the  part  of  both  employer  and  employee 
to  make  them  right,  and  where  they  are  fairly  maintained 
after  they  have  been  set,  they  are  often  (almost  usually) 
preferred  by  the  men;  for  they  make  the  man  more  the 
master  of  his  own  time,  and  they  enable  the  capable  work- 
man to  increase  his  earnings  in  correspondence  with  his 
ability  and  capacity.  Where  the  men  will  work  fairly  under 
the  piece  rates  they  are  liked  by  employers  also  because 
the  system  stimulates  larger  production  from  the  same  plant 
without  materially  increasing  the  indirect  operating  ex- 
penses. These  are  the  advantages  of  the  piece-rate  sys- 
tem —  increased  output  and  increased  earnings.  •  Its  dis- 
advantages are  that  when  difficulties  interfere  with  output 


PRIMARY    WAGE    SYSTEMS  125 

the  men's  loss  is  not  made  up  to  them  without  special  action 
by  the  employer ;  1  and,  worst  of  all,  that  when  the  em- 
ployees* earnings  are  very  much  increased  the  employer  can 
seldom  resist  the  temptation  to  cut  the  rate.  Knowing  this, 
the  men  are  frequently  suspicious  and  seldom  let  themselves 
out  to  anything  like  their  real  capacity. 

The  "  contract  plan  "  of  employing  and  paying  labor  is 
used  to  some  extent,  especially  in  heavy  machine-shops,  that 
is,  locomotive  and  shipbuilding  plants,  in  the  United  States 
and  Great  Britain.  It  is  not,  however,  a  separate  and  dis- 
tinct system,  but  is  substantially  a  gang  piece  rate.  An 
over-all  price  for  a  job  is  agreed  upon  with  the  contractor, 
who  uses  the  equipment  and  facilities  of  the  employing  shop, 
but  hires  his  own  workers  and  assistants  on  terms  arranged 
between  him  and  them.  As  discipline  and  responsibility 
thus  fall  chiefly  on  the  contractor,  while  the  tools,  facilities 
and  general  environment  are  largely  supplied  by  the  shop, 
the  plan  leads  to  a  somewhat  demoralizing  divorce  of  au- 
thority and  liability.  It  is  likely  to  lead,  and  in  practice 
it  does  lead,  to  very  bad  industrial  conditions.  Neverthe- 
less, it  has  been  in  use  for  a  long  time,  and  remains  in  use, 
and  hence  must  be  considered  a  practical  and  to  an  extent 
commercially  successful  method,  although  the  success  is  not 
determined  by  very  high  standards. 

And  now,  having  noted  the  principle  characteristics  of 
the  two  fundamental  methods  of  wage  payment  —  day  pay 
and  piece  pay  —  we  come  to  the  systems  which  I  have  called 
"  advanced  " ;  that  is,  the  special  systems  designed  to  correct 
or  to  reduce  greatly  the  evils  of  the  straight  day  wage  and 
the  straight  piece  rate.  The  principal  of  these  are  the 
Halsey  premium  plan,  the  Taylor  differential  piece  rate, 
the  Gantt  bonus  system,  and  the  Emerson  efficiency  or  in- 

1  The  objection  is  inseparable  from  the  straight  piece-rate  system.  It 
is,  however,  removed  by  the  "  piece-rate  with  guaranteed  day  wages," 
which  is  becoming  well-known,  especially  in  railway  shops. 


126  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

dividual-effort  system.  They  are  placed  in  this  order  for 
reasons  that  will  appear  as  we  go  on.  And  the  Halsey 
premium  plan  is  placed  first  because  it  is  simply  and  only 
a  wage  system,  while  the  others  are  rather  parts  of  philoso- 
phies and  methods  of  handling  labor  in  which  the  wage 
system  is  only  one  element. 

The  Halsey  premium  plan  1  bears  the  strong  impress  of 
intimate  familiarity  with  the  shop  —  of  complete  knowledge 
of  the  traditions  of  the  shop,  the  suspicions  of  the  shop 
men,  and  the  weaknesses  of  shop  managers;  and  it  seems 
to  be  marked  further  by  a  conviction  of  the  strength  of 
these  long-established  institutions  and  by  a  tenderness  to- 
ward disturbing  or  offending  them.  It  is,  in  short,  a  char- 
acteristically well-informed  effort  to  get  good  results,  to 
bring  about  better  conditions,  without  making  any  trouble. 

The  essence  of  the  Halsey  premium  system  is  to  pay  men 
the  established  day  wage  under  any  circumstances,  and  then 
to  reward  them  further  by  a  voluntary  extra  payment  if 
they  do  better  than  the  established  record  of  past  perform- 
ances. When  the  system  is  introduced  there  is  no  necessary 
or  conspicuous  change  from  the  way  things  have  always 
been  done.  Every  man  gets  his  regular  day  wages  on  pay 
day  exactly  as  before.  But  by  reference  to  past  records, 
standard  times  are  set  for  the  various  operations  upon 
which  the  workmen  are  engaged.  In  setting  these  stand- 
ard times  some  allowance  may  be  made  for  the  probable 
shortening  of  the  old  records  under  the  incentive  the  pre- 
mium system  is  going  to  offer;  but  in  the  main  the  controlling 
consideration  is,  how  long  did  the  job  take  on  the  average 
when  it  was  done  by  good  workmen  in  the  past?  These 
standard  times  are  tabulated,  recorded  in  the  office  for  ref- 
erence, and  the  times  taken  by  the  men  day  by  day  in  doing 

1 "  The  Premium  Plan  of  Paying  for  Labor,"  by  F.  A.  Halsey;  Trans. 
Am.  Soc.  M.  E.,  June,  1891. 


PRIMARY    WAGE    SYSTEMS  127 

these  same  jobs,  or  performing  the  same  operations,  are 
compared  with  these  standards.  When  any  man  shortens 
the  standard  time  on  any  job  after  the  plan  has  been  put 
in  force,  he  is  credited  with  a  premium,  which  is  equal  to 
his  wages  at  his  regular  hourly  rate  for  a  portion  of  the 
time  he  saved  on  the  job.  This  portion  is  usually  either 
30  or  50  per  cent  of  the  time  saved.  The  idea  of  grant- 
ing only  part  of  the  saved  time  to  the  workman  is  twofold. 
First,  he  uses  the  shop  facilities  harder  —  uses  more  power, 
wears  out  more  tools,  etc.,  and  so  the  shop  should  have 
part  of  the  gain;  second,  as  the  employer  thus  profits  as 
well  as  the  man,  he  is  less  likely  to  be  tempted  to  cut  rates 
when  the  time  is  a  good  deal  shortened. 

Premium  earnings  are  kept  separate  or  may  be  kept  sep- 
arate from  the  regular  payroll  and  enclosed  in  separate 
pay  envelopes.  Their  acceptance  by  the  men  is  wholly 
voluntary.  The  workman  can  take  his  premium  or  leave 
it ;  but  he  usually  takes  it  —  if  not  at  first  —  when  the  ac- 
cumulation begins  to  look  tempting.  It  is,  however,  plain 
that  the  introduction  of  the  system  raises  no  issue  which 
could  well  be  a  basis  of  a  strike,  as  the  introduction  of  piece 
rates  into  the  day-work  shop  might  do.  It  does  not  abolish 
old  conditions  and  introduce  new  ones,  which  must  be  ac- 
cepted whether  they  are  liked  or  not.  It  simply  offers  a 
new,  non-compulsory  opportunity  for  the  men  to  earn  more 
money  if  they  choose,  without  any  arbitrary  or  even  neces- 
sary imposition  of  a  forced  rate  of  working.  Furthermore, 
the  calculation  of  the  premium  is  the  simplest  sort  of  a  sum 
in  elementary  arithmetic.  The  standard  times  are  posted. 
The  workman  can  keep  a  record  of  his  own  times.  All 
he  has  to  do  is  to  find  by  subtraction  how  much  time  he 
has  saved,  take  one-half  of  it  or  30  per  cent  of  it,  as  the 
case  may  be,  and  he  knows  his  own  premium  at  once.  On 
account  of  its  simplicity  and  its  conciliatory  characteristics, 


128  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

probably,  the  Halsey  premium  plan  is  in  use  in  a  larger 
number  of  shops  than  any  other  of  the  advanced  wage 
systems. 

Halsey  puts  no  upper  limit  on  a  workman's  earnings. 
However  much  the  man's  skill  and  ingenuity  may  shorten 
the  times  he  gets  his  regular  proportion  of  the  gain.  One 
objection  sometimes  raised  to  the  plan  is  that  as  the  times 
are  not  scientifically  set  (that  is,  as  the  operations  are  not 
scientifically  studied  and  figured  down  to  the  shortest  prac- 
ticable time),  they  may  sometimes  prove  to  be  very  much  in 
error  against  the  shop,  and  the  discovery  that  they  are  and 
that  the  men  in  consequence  are  making  very  high  premiums 
may  tempt  the  employer  to  cut  them  down,  something  in 
the  same  way  as  piece  rates  are  so  often  cut  down. 

James  Rowan,  a  member  of  a  prominent  firm  of  engine 
builders  in  Glasgow,  has  put  forth  a  modification  of  the 
premium  plan,  generally  known  as  the  Rowan  premium, 
which  has  as  one  of  its  principal  objects  the  protection  of 
the  shop  against  such  mistakes  as  are  referred  to  in  the 
preceding  paragraph.  The  fundamental  principle  of  the 
Rowan  premium  plan  is  that  under  no  circumstances  can  the 
workman  make  more  than  double  his  regular  day  wages. 
Under  the  Rowan  system  the  time  saved  is  converted  into 
a  percentage  of  the  standard  time.  The  workman  then  re- 
ceives, as  a  premium,  this  same  percentage  of  the  time  he 
actually  took.  Another  way  of  defining  the  Rowan  premium 
takes  the  form  of  the  equation : 

Time  saved        ~. 

— ; X  1  inie  taken  =  Premium. 

Time  set 

The  system  is  regarded  with  a  good  deal  of  favor  in  Eng- 
land, but  it  is  not  much  used  in  the  United  States.  It  pays 
the  workman  more  largely  than  the  Halsey  plan  for  the 
earlier  (and  easier)  savings,  but  as  the  base  upon  which 
the  premium  is  calculated  shrinks  constantly  as  time  is  saved, 
the  man's  profit  from  large  savings  of  time  decreases  pro- 


PRIMARY    WAGE    SYSTEMS  129 

portionately.  The  actual  premium  is  the  same  at  90  per 
cent  time  saved  as  at  10  per  cent.  There  are  some  other 
special  modifications  of  the  premium  plan  in  use,  but  it  is 
not  important  to  include  them  here. 


LABOR.     PHILOSOPHIES  OF  MANAGEMENT 


CHAPTER  VIII 
LABOR.    PHILOSOPHIES  OF  MANAGEMENT 

PROCEEDING  now  from  the  wage  systems  which  are 
merely  modes  of  payment  —  that  is,  which  do  not  go 
beyond  the  concept  of  enlisting  the  workman's  interest 
through  the  medium  of  his  compensation  —  we  come  to  an- 
other group  of  methods  in  which  the  manner  of  payment 
is  only  one  feature  of  a  policy  of  management,  embodying 
many  other  ideas  and  principles. 

Prominent  among  these  as  one  of  the  early  and  very 
widely  noticed  applications  of  the  ideas  upon  which  other 
systems  of  very  different  philosophy  have  been  built,  is  the 
Taylor  differential  piece  rate.1  More  than  thirty  years  ago, 
at  the  Bethlehem  Steel  Works,  Frederick  W.  Taylor  began 
a  development  of  the  conception  that  labor  of  all  kinds, 
operations  of  all  kinds,  could  be  scientifically  studied  and 
analyzed  and  reduced  to  elementary  processes;  that  these 
elementary  processes  could  each  be  performed  in  some  one 
best  way,  discoverable  by  an  expert  investigator;  that  there 
was  a  minimum  of  time  in  which  each  could  be  continuously 
performed  by  a  good  workman ;  that  the  workman  could  be 
taught  to  do  each  elementary  operation,  and  hence  the  en- 
tire job,  in  the  best  way  and  the  minimum  time;  and  that 
the  payment  of  a  considerably  larger  price  for  work  done 
according  to  the  standard  than  for  work  that  failed  to 
reach  the  standard  would  secure  the  co-operation  of  the  em- 
ployee and  induce  him  to  put  forth  his  best  effort. 

The    Taylor    system    is    no    longer    followed    at    South 

1  "  A  Piece- Rate  System,"  by  Fred  W.  Taylor ;  Trans.  Am.  Soc.  M.  E., 
June,  1895. 

133 


134  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

Bethlehem  but  its  data  are  so  important  on  account  of  the 
influence  they  have  exerted  on  later  practitioners  that  they 
deserve  more  careful  attention  than  the  number  of  actual 
instances  of  the  use  of  the  system  would  seem  to  suggest. 

Taylor  begins,  then,  by  an  ultimate  analysis  of  the  job 
into  its  elements.  Each  of  these  elements  is  then  subjected 
to  thorough  expert  study  to  determine  the  methods  and  ap- 
pliances by  which  a  man  working  steadily  at  a  pace  he  can 
maintain  without  injury  can  reach  maximum  performance 
and  minimum  time.  The  workman  is  then  provided  with 
everything  necessary  to  accomplish,  in  the  standard  time, 
the  results  determined  by  this  study,  and  he  is  thoroughly 
instructed  in  every  step  of  the  operation  by  minutely  de- 
tailed written  schedules  and  by  expert  advisers. 

Finally,  he  is  paid  at  piece  rates  which  are  set  at  two  dif- 
ferent levels  —  a  low  price  per  piece  if  the  workman  fails 
to  do  the  job  in  the  standard  time,  and  a  high  price  per 
piece  if  he  does  it  in  the  standard  time.  This  is  the  so- 
called  differential  rate.  The  successful  worker  is  paid  not 
only  for  the  more  pieces  he  turns  out,  but  he  is  also  paid 
more  for  each  piece.  The  unsuccessful  worker  not  only 
makes  less  pieces  to  be  paid  for,  but  is  paid  less  for  each 
piece  of  the  smaller  number  he  makes.  The  money  gain 
to  the  man  who  attains  standard  performance  thus  becomes 
very  large. 

For  example,  suppose  a  standard  performance  for  a  cer- 
tain repetitive  job  is  set  at  ten  pieces  completed  per  day. 
The  piece  rate  may  then  be  fixed  at  30  cents  each  if  stand- 
ard time  is  attained  and  only  25  cents  a  piece  if  it  is  not. 
The  workman  who  finishes  only  nine  pieces  in  a  day  re- 
ceives but  25  cents  each,  or  a  total  of  $2.25.  The  work- 
man who  finishes  the  ten  pieces  set  as  a  standard  receives 
30  cents  each  or  a  total  of  $3.  For  an  increase  of  only 
1 1  per  cent  in  production  he  gains  an  increase  of  33  1-3 
per  cent  in  wages.  This  large  incentive  is  provided  to  en- 


PHILOSOPHIES    OF    LABOR    MANAGEMENT  135 

list  the  co-operation  of  the  workman  —  to  make  him  con- 
tribute his  part  to  the  effort  which  was  begun  by  the  man- 
agement in  their  study  of  conditions  and  their  provision 
of  the  equipment  and  the  instruction  which  would  enable 
the  man  to  turn  out  a  large  volume  of  product.  Under  the 
Taylor  system,  however,  it  is  not  intended  to  leave  within 
the  workman's  power  much  more  than  this  co-operation. 
That  is,  it  is  not  intended  to  rely  upon  the  workman  to 
originate  betterments  in  practice,  at  least  until  he  has  ac- 
cepted all  the  betterments  contemplated  *by  the  investigators 
and  instructors.  This  is  a  sharp  distinction  from  the  Halsey 
system.  Halsey  relies  almost  entirely  upon  the  workman's 
knowledge  of  his  job,  the  workman's  intimate  acquaintance 
with  shop  conditions,  tools  and  the  details  of  the  operation 
to  perform  this  operation  better  and  more  quickly  when 
the  incentive  of  additional  pay  is  provided.  Taylor,  by  a 
minute  time  study  and  a  carefully  elaborated  scheme  of 
operations,  manipulations  and  methods,  purposes  to  super- 
sede the  workman's  knowledge  —  to  cancel,  as  it  were,  the 
workman's  personal  equation.  In  principle,  there  is  no 
objection  to  the  workman  turning  out  as  large  an  excess 
over  the  standard  output  as  he  can.  In  practice  it  is  not  in- 
tended to  leave  him  any  large  margin  of  capacity  for  doing 
better  than  the  standard.  And,  like  the  ordinary  piece 
rate,  if  a  man  does  not  reach  standard  his  wages  drop. 
There  is  no  minimum  wage  assured. 

The  bonus  plan  worked  out  by  H.  L.  Gantt,1  an  associ- 
ate of  Mr.  Taylor,  has  rather  more  elasticity  and  has 
found  highly  successful  application.  Like  Taylor,  Gantt 
begins  with  standardization  of  conditions  and  accurate  time 
study.  That  is,  he  makes  it  possible  for  the  man  to  work 
fast,  and  decides  as  nearly  as  possible  just  how  fast  the  man 

!"Task  and  Bonus,"  by  H.  L.  Gantt;  Trans.  Am.  Soc.  M.  K,  1901. 
For  a  much  fuller  argument  see  "  Work,  Wages  and  Profits,"  by  H.  L. 
Gantt ;  The  Engineering  Magazine. 


136  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

should  work.  The  initial  engagement  of  the  workman, 
however,  is  on  a  day-pay  basis.  The  workman  is  sure  of 
regular  day  wages  as  a  minimum.1  Under  the  Taylor  piece 
rate,  or  any  piece  rate,  the  minimum  as  well  as  the  maximum 
depends  on  the  number  of  pieces  made.  If  a  man  is  unlucky 
and  does  not  finish  even  one  piece  he  gets  nothing.  Under 
the  Gantt  system  he  gets  day  wages  however  little  he  may 
produce.  The  computations  for  extra  or  bonus  payment 
thereafter  are  on  the  basis  of  time.  To  use  Mr.  Gantt's 
own  words: 

"  Under  this  system  each  man  has  his  work  assigned  to 
him  in  the  form  of  a  task  to  be  done,  by  a  prescribed  method, 
with  definite  appliances,  and  to  be  completed  within  a  cer- 
tain time.  The  task  is  based  on  a  detailed  investigation  by 
a  trained  expert  of  the  best  method  of  doing  the  work;  and 
the  task  setter,  or  his  assistant,  acts  as  an  instructor  to 
teach  the  workmen  to  do  the  work  in  the  manner  and  time 
specified.  If  the  work  is  done  within  the  time  allowed  by 
the  expert,  and  is  up  to  the  standard  for  quality,  the 
workman  receives  extra  compensation  (usually  20  to  50 
per  cent  of  the  time  allowed)  in  addition  to  his  day's  pay. 
If  it  is  not  done  in  the  time  set,  or  is  not  up  to  the  standard 
for  quality,  the  workman  receives  his  day's  pay  only. 

"The  system  is  thus  in  effect  a  combination  of  the  day- 
rate  and  piece-work  systems.  While  learning  to  do  his 
task  the  workman  is  on  a  day  rate ;  when  he  has  learned  to 
do  it  the  compensation  for  the  task  is  a  fixed  quantity,  really 
equivalent  to  piece  rate.  The  method  of  payment,  then, 
is  day  rate  for  the  unskilled  and  piece  work  for  the  skilled." 

The  Gantt  system  produces  the  true  piece-rate  result  that 
a  workman  receives  full  pay  at  the  bonus  rate  for  all  the 

1  This  seems  much  like  the  "  piece  rate  with  guaranteed  day  wages," 
referred  to  in  a  preceding  note.  One  difference  is  that  if  the  "task"  is 
changed,  it  is  a  change  of  time  and  not  an  immediate  change  of  price, 
and  the  effect  on  the  men  is  much  more  favorable. 


PHILOSOPHIES    OF    LABOR    MANAGEMENT  137 

time  he  saves.  He  does  not  divide  the  time  saved  with  the 
shop  as  he  does  under  the  premium  plan. 

Gantt,  like  Halsey,  puts  no  limitations  —  that  is,  no 
arbitrary,  or,  as  we  might  say,  official  limitation  —  on  the 
amount  a  man  may  earn.  He  does  not  set  any  maximum, 
as  Rowan  does,  on  the  theory  that  a  workman  should  not 
be  permitted  to  make  more  than  a  certain  scale  of  wages. 
But  Gantt  does  in  substance  set  a  natural  limit  to  maximum 
earnings  by  putting  the  task  limit  so  high  that  even  the  most 
skillful  and  energetic  man  could  not  greatly  exceed  it.  He 
does  this  deliberately,  because  in  the  first  place,  when  con- 
ditions are  scientifically  adjusted  to  eliminate  the  ordinary 
chances  and  mischances  of  haphazard  working,  and  when 
operations  are  scientifically  laid  out  and  the  time  it  takes  to 
do  them  is  scientifically  studied,  and  when  men  are  carefully 
instructed  in  performing  the  operations  in  the  manner  thus 
scientifically  studied  out,  the  performances  of  normally 
capable  individuals  ought  not  to  and  will  not  vary  very 
widely  from  the  determined  standard. 

For  instance,  if  100  men  of  average  physique,  taken  at 
random,  were  required  to  run  100  yards  in  their  ordinary 
clothing  and  under  ordinary  conditions  of  preparation  and 
amid  ordinary  surroundings  of  street  travel,  the  results 
would  probably  vary  by  many  hundred  per  cent,  because  not 
only  of  the  varying  fitness  of  the  men,  but  of  the  varying 
obstacles  and  delays  they  would  meet.  But  if  you  should 
take  the  same  hundred  men,  train  them  for  six  months,  put 
them  on  a  standard  running  track,  in  regular  running  cos- 
tume, you  would  probably  find  that  most  of  them  would  do 
the  hundred  yards  in  times  varying  not  more  than  50  per 
cent  and  probably  not  more  than  20  per  cent.  This  is  the 
kind  of  standardizing  Gantt's  preparatory  measures  are 
designed  to  accomplish. 

And  in  the  second  place,  it  is  part  of  Gantt's  theory  that 
no  large  reserve  capacity  (that  is,  capacity  of  surpassing 


138  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

standard  task)  should  be  left  to  the  workman,  for  fear 
that  if  he  does  very  greatly  better  the  prescribed  perform- 
ance, and  so  very  greatly  increase  his  earnings,  the  employer 
will  be  tempted  to  cut  wages  and  so  will  destroy  the  whole 
scheme.  This  danger  is  avoided  if  the  bonus  task  is  set  so 
high  that  no  workman  unless  he  is  a  living  phenomenon  can 
better  it  by  at  the  utmost  50  per  cent. 

Like  the  differential  piece  rate,  the  Gantt  bonus  system 
is  characterized  by  a  sort  of  critical  point  at  which  the  wages 
received  by  the  worker  rise  suddenly  on  arrival  at  a  certain 
volume  of  production.  The  effect  of  the  Gantt  bonus  as 
a  stimulus  to  the  workman  is  something  like  that  of  offering 
a  big,  shining  prize  to  every  man  who  jumps  up  a  high  step. 
The  prize  seeker  either  lands  or  he  fails.  There  is  no  half 
success  possible.  The  total  result  of  such  a  tournament, 
if  there  are  entries  enough,  would  be  the  collection  of  an 
athletic  body  of  high  jumpers  on  the  upper  step,  while  the 
field  would  be  left  below. 

Applying  the  same  simile  to  the  Halsey  premium  plan, 
we  might  say  that  it  offers  the  workers  on  the  lower  level 
an  inclined  plane  up  which  to  climb,  with  prizes  for  every 
one  who  climbs  at  all,  infinitesimally  graduated  in  direct 
proportion  to  the  distance  climbed.  The  natural  result  of 
such  a  tournament  is  a  graded  classification  of  moderate 
athletes,  whose  performances  range  all  the  way  from  the 
record  holder  to  the  tail  ender.  And  there  is  also  a  natural 
tendency  for  the  crowd  to  thin  out  toward  the  upper  levels, 
because  as  a  man  climbs  each  step  becomes  harder,  and  yet 
the  premium  for  the  last  step  is  no  greater  than  the  premium 
for  the  first. 

The  illustration  just  used  is  not  intended  to  suggest  the 
slightest  disparagement  of  either  the  theory  or  practice  of 
the  task  and  bonus  system.  Under  Gantt's  direction  of  it, 
the  most  careful,  thoughtful,  and  skillful  instruction  and 
assistance  toward  accomplishing  the  task  is  given  to  the 


PHILOSOPHIES    OF    LABOR   MANAGEMENT  139 

operative.  To  the  utmost  possible  degree,  all  obstacles  to 
achievement  are  removed.  Those  who  can  not  succeed  at 
one  task*  are  given  every  opportunity  to  try  some  other  for 
which  perhaps  they  may  be  better  fitted.  Those  who  do 
succeed  are  unquestionably  greatly  benefited,  both  phys- 
ically and  financially.  Nevertheless,  for  any  given  work  the 
system  is  largely  selective,  discovering  the  fully  fit  (who  are 
generally  a  minority)  and  shifting  the  unfit  (who  are  gen- 
erally a  majority)  to  other  occupations. 

Because  Halsey  and  Gantt  both  grant  day  wages  as  a 
minimum  and  add  something  more  if  a  man  exceeds  stand- 
ard performance,  there  is  an  unfortunately  general  but  ill- 
informed  impression  that  the  systems  are  much  alike. 
Psychologically  —  that  is,  in  their  interpretation  of  and 
appeal  to  human  emotions  —  they  are  almost  diametrically 
unlike.  They  seek  similar  results  (an  increase  of  produc- 
tion) and  they  offer  a  similar  reward  (pay  for  time  saved) 
but  by  contradictory  policies.  Halsey  is  so  desirous 
not  to  "  stir  up  things  "  that  he  scarcely  lets  the  men  know 
that  times  are  being  studied.  Gantt  is  so  desirous  to  make 
large  output  possible  that  he  would  make  most  radical  and 
far-reaching  changes  if  necessary  to  remove  causes  of  in- 
efficiency. Halsey  relies  entirely  on  the  workman's  ability 
to  find  ways  of  shortening  the  standard  time.  Gantt 
analyzes  each  job  scientifically,  resolves  it  into  its  elements, 
determines  the  best  way  and  the  minimum  time  for  per- 
forming each,  and  will  not  even  let  a  workman  try  to  earn 
bonus  until  the  man  has  been  thoroughly  instructed  by  an 
expert.  Halsey  abhors  the  idea  of  setting  any  "  task  "  as 
the  limit  a  man  must  reach.  Gantt  glories  in  the  "  task  " 
as  a  stimulus  to  effort,  and  makes  such  a  task  the  goal  a  man 
must  reach  before  bonus  begins.  Halsey  tempts  the  man 
on  by  at  least  a  small  premium  for  even  a  trifling  gain  in  the 
time  used.  Gantt  gives  no  bonus  until  the  very  large  gain 
necessary  to  reach  his  task  limit  has  been  made,  and  then 


140  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

he  gives  a  great  big  bonus  —  25  per  cent  or  50  per  cent 
all  at  once. 

Halsey  avoids  class  distinctions  by  making  the  passage 
from  day-wage  earnings  only  to  premium  earnings  a  progress 
of  insensible  gradations.  Gantt  emphasizes  class  distinction 
not  only  by  the  sharp  and  wide  break  between  day  wages 
and  bonus  earning,  but  also  by  encouraging  outward  signs 
and  symbols  of  bonus  earning  —  encouraging  the  group  of 
bonus  workers  and  the  creation  of  a  bonus  society,  entry 
into  which  is  a  desirable  goal  for  those  who  are  still  in  the 
no-bonus  class. 

These  things  are  really  more  important  in  dealing  with 
men  than  questions  of  20  per  cent,  or  30  per  cent,  or  50 
per  cent  premium ;  and  in  these  things  the  philosophies  of 
Gantt  and  Halsey  take  widely  different  and  opposing  views. 

The  Emerson  efficiency  or  individual-effort  system  1  has 
certain  resemblances  to  both  the  Halsey  premium  and  the 
Gantt  bonus  plans.  It  recognizes  that  there  is  truth  in  the 
psychology  of  both  these  systems,  different  as  they  are 
psychologically,  and  it  recognizes  advantages  in  both  their 
methods.  Nevertheless,  although  it  has  these  resemblances 
it  proceeds  by  a  philosophy  and  a  plan  of  its  own",  which  is 
distinct  and  characteristic. 

To  begin  with,  it  establishes  the  regular  daily-wage  scale 
and  system  as  the  basis  of  employment,  thus  agreeing  with 
both  Halsey  and  Gantt.  Next,  it  prescribes  the  standard 
of  production  after  scientific  study,  and  offers  a  rather  large 
bonus  for  reaching  it,  thus  agreeing  with  Gantt;  but  it  leads 
up  to  this  bonus  reward  by  a  graduated  scale  of  smaller 
bonuses,  thus  approaching  the  Halsey  premium  plan. 

To  take  up  its  features  in  greater  detail,  let  us  go  back 
to  the  measures  preliminary  to  the  introduction  of  the  sys- 

1  "  A  Rational  Basis  for  Wages,"  by  Harrington  Emerson ;  Trans.  Am. 
Soc.  M.  E.,  June,  1904.  Also  "  Efficiency  as  a  Basis  for  Operation  and 
Wages  "  ;  The  Engineering  Magazine. 


PHILOSOPHIES   OF    LABOR    MANAGEMENT  141 

tern.  As  in  the  case  of  the  Taylor  and  Gantt  policies  al- 
ready described,  the  arrangement,  equipment,  and  working 
conditions  in  the  shop  or  factory  are  standardized  to  secure 
the  utmost  efficiency  and  to  prevent  all  wastes  and  losses  that 
are  preventable.  Standard  times  for  every  operation  are 
then  determined  and  scheduled  by  the  most  careful  study. 
In  setting  these  times  Emerson  apparently  gives  more  weight 
to  averaged  past  experience  than  Taylor  or  Gantt,  but  is 
not  so  closely  governed  by  it  as  Halsey.  Taylor  and  Gantt, 
indeed,  are  inclined  to  proceed  without  much  regard  to  what 
has  been  the  practice  in  any  particular  case.  They  go  back 
to  the  very  best  way  of  doing  the  thing,  and  having  de- 
termined this  scientifically  for  every  element,  they  add  these 
elementary  operation  times  together,  allow  a  certain  factor 
for  what  might  be  called  the  human  equation  —  that  is, 
a  margin  by  which  the  workman  may  be  permitted  to  fall 
short  of  perfection  —  add  perhaps  another  factor  for  im- 
perfection of  materials,  and  so  arrive  at  a  final  result. 
Halsey  is  disposed  to  make  good  existing  shop  practice  the 
standard  and  not  to  go  very  far  back  of  that  in  setting  stand- 
ard times,  but  to  rely  largely  on  the  skill  and  effort  of  the 
individual  workman  for  finding  ways  of  bettering  the  old 
records.  Emerson's  policy  inclines  rather  to  the  method 
of  taking  such  records  as  Halsey  would  accept  as  standards, 
and  refining  down  by  deducting  for  the  preventable  wastes 
and  losses  that  have  been  occurring  and  that  are  to  be  elimi- 
nated by  the  improvements  installed.  This  method,  as  will 
be  seen,  goes  upon  the  supposition  that  if  you  take  practice 
as  it  is,  and  correct  it  for  all  the  errors  and  inefficiencies  you 
can  discover  and  identify,  the  residue  will  be  automatically 
self-corrected  with  such  inherent,  necessary,  and  unprevent- 
able  inefficiencies  and  wastes  as  are  innate  in  conditions  and 
undiscoverable  by  inspection. 

Under  the  efficiency  system,  if  a  workman  finishes  a  job 
or  an  operation  in  the  standard  time  which  has  been  fixed, 


142  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

he  receives  a  bonus  of  20  per  cent.  This  rate  is  about  the 
same  as  the  lower  limit  usually  adopted  by  Gantt.  The 
Emerson  bonus  for  standard  performance,  however,  is  al- 
ways 20  per  cent,  while  Gantt  varies  somewhat  with  the 
agreeableness  or  disagreeableness  of  the  work,  occasionally 
running  as  high  as  50  per  cent  and  probably  averaging 
from  30  to  40.  Under  the  efficiency  plan,  however,  if  the 
workman  reaches  two-thirds  of  the  standard  performance 
(that  is,  if  he  finishes  the  job  in  one  and  a  half  times  the 
standard  time)  he  reaches  a  point  beyond  which  he  begins 
to  receive  a  little  extra  reward,  increasing  gradually  like  the 
Halsey  premium.  This  reward,  however,  instead  of  rising 
at  a  uniform  rate  as  the  Halsey  premium  does,  rises  on  a 
sliding  scale.  It  rises,  in  fact,  as  a  function  of  a  parabola, 
the  performance  being  measured  along  the  curve  and  the 
bonus  being  apportioned  according  to  the  ordinate.  This 
makes  the  bonus  very  small  indeed  for  the  early  savings  of 
time  below  time  and  a  half.  It  merges  into  the  20  per  cent 
bonus  at  standard  performance.  For  still  further  reductions 
of  time,  that  is,  for  doing  the  work  in  less  than  standard  time 
set,  the  workman  gets  the  20  per  cent  bonus,  plus  all  the 
time  that  he  saves. 

In  the  practical  use  of  the  system,  the  individual  bonuses 
are  usually  calculated  for  each  man's  work  for  a  period  of 
one  month.  His  efficiency  for  that  entire  time  is  reduced 
to  a  percentage  by  dividing  the  times  allowed  by  the  times 
taken.  For  instance,  taking  a  single  job  as  an  example, 
if  a  man  takes  90  minutes  to  do  a  job  standardized  at  60 
minutes,  his  efficiency  is  60  divided  by  90,  or  66  2-3  per 
cent.  If  he  takes  60  minutes  to  do  a  job  standardized  at 
60  minutes  his  efficiency  is  60  divided  by  60,  or  100  per 
cent.  If  he  takes  only  40  minutes  to  do  a  job  standardized 
at  60,  his  efficiency  is  60  divided  by  40,  or  150  per  cent.  As 
already  explained,  however,  it  is  characteristic  of  the 
Emerson  efficiency  system  that  the  efficiency  is  not  calcu- 


PHILOSOPHIES    OF    LABOR    MANAGEMENT  143 

lated  job  by  job,  but  on  the  sum  of  all  the  work  done  during 
the  bonus  period,  which,  as  already  explained,  is  usually  one 
month.  Two  important  results  are  thus  secured.  The 
first  is  that  elaborately  accurate  timekeeping  is  not  neces- 
sary for  wage  purposes,  although  quite  apart  from  this  it 
may  be  desired  for  cost-keeping  purposes.  All  the  pay- 
master needs  is  a  list  of  the  jobs  each  man  did  during  the 
bonus  period.  He  takes  off,  from  the  standardized  sched- 
ule of  operations,  the  standard  times  allowed  for  these  jobs, 
adds  them  together,  and  divides  these  total  standard  hours 
by  the  total  of  the  wage  hours  the  man  actually  worked. 
The  result  gives  him  the  man's  efficiency  percentage  for 
bonus  calculation.  He  looks  in  his  standard  table  for  the 
bonus  corresponding  to  that  efficiency  and  adds  it  to  the 
man's  regular  wages.  The  first  result,  then,  is  that  minute 
time-taking  is  not  essential.  The  second  result  is  that  un- 
less a  man  maintains  good  efficiency  on  all  jobs  his  bonus  is 
automatically  cut  down.  Suppose,  working  repetitively  at 
a  job  standardized  at  60  minutes,  a  man  should  spurt  for 
two  hours  at  a  4O-minute  gait,  and  then  should  loaf  for 
eight  hours  at  a  i2O-minute  gait,  he  would  finish  in  600 
minutes  only  seven  jobs  standardized  in  total  at  420  min- 
utes. His  efficiency  would  be  420  divided  by  600,  or  70 
per  cent.  His  bonus  would  practically  disappear.  He 
would  still  get  his  day  wages,  of  course,  just  as  he  would 
under  the  Gantt  plan  or  the  Halsey  plan;  but  under  the 
Halsey  premium  he  would,  and  under  the  Gantt  system  he 
might,  be  awarded  bonus  for  the  three  quick  jobs,  although 
on  the  whole  he  was  not  a  profitable  man  to  the  shop.  It 
is  not  uncommon,  where  the  premium  system  is  in  force,  for 
men  to  beat  the  shop  in  this  way  by  earning  a  good  pre- 
mium through  an  energetic  spurt  and  then  loafing  along 
at  day  wages  for  some  time  afterwards.  This  disposition 
is  automatically  met  by  the  efficiency  plan.  Gantt  provides 
for  it  to  a  considerable  extent  by  offering  a  secondary  bonus ; 


144 


PRINCIPLES    OF   INDUSTRIAL    ENGINEERING 


for  example,  a  bonus  to  the  foreman  if  every  man  under 
him  makes  bonus,  or  a  second  bonus  to  the  worker  who 
makes  bonus  every  day  in  the  week. 

A  peculiar  point  in  the  efficiency  system  is  that  the  bonus 
begins  at  66  2-3  per  cent  efficiency.  The  awards  for  the 
earlier  and  easier  savings  of  time,  however,  are  very  small. 
At  67  per  cent  efficiency  the  bonus  is  i-ioo  of  i  per  cent 
of  a  man's  wages.  It  does  not  become  i  per  cent  of  his 
wages  until  he  reaches  74  per  cent  efficiency.  At  77  per 
cent  efficiency  the  bonus  is  2  per  cent  of  wages;  at  83  per 
cent  it  is  5  per  cent  of  his  wages;  at  90  per  cent  efficiency,  10 
per  cent  of  wages;  and  at  100  per  cent  efficiency,  20  per  cent 
of  wages.  The  full  table  is  given  below : 


CO 

c/3 

CO 

CO 

.      <u 

^j 

CJ 

i 

.      <u 

>>  c 

CJ      <U 

&£ 

>>     C 

U      QJ 

fc    ^ 
o<  55 

t  I 

£   to 

£  g 

§,  S* 

C     {-' 

c   o 

^ 

c    w 

^ 

C     y 

^ 

CO 

t> 

CO 

CO 

C/5 

'S   fc 

§  8 

•  -    w. 

O      Q^ 

C     8 

•S  53 

§  8 

•«     J-i 

CJ       Q^ 

§  8 

q~*      O* 

O    ,4 

^C      ^ 

O    _; 

^C     ^ 

o     • 

(^      OH 

o     • 

W 

w 

w 

pq  ^ 

w 

pq  j^ 

67 

.0001 

78 

.0238 

88 

.0832 

99 

.1881 

68 

.0004 

79 

.0280 

89 

.0911 

IOO 

.20 

69 

.0011 

80 

.0327 

90 

.0991 

101 

.21 

70 

.0022 

81 

.0378 

91 

.1074 

IO2 

.22 

71 

.0037 

82 

.0433 

92 

.1162 

103 

•23 

72 

•0055 

83 

.0492 

93 

.1256 

105 

.25 

73 

.0076 

84 

•0553 

94 

•  1352 

no 

•30 

74 

.OIO2 

85 

.0617 

95 

•1453 

1  20 

.40 

75 

.0131 

86 

.0684 

96 

•  1557 

130 

•50 

76 

.0164 

87 

.0756 

97 

.1662 

135 

•55 

77 

.0199 

87-5 

.0794 

98 

.1770 

140 

.60 

To  go  back  to  a  simile  already  used,  if  Gantt  invites  the 
men  to  jump  and  Halsey  coaxes  them  up  an  inclined  plane, 
we  might  say  that  Emerson  shapes  this  plane  to  a  gradually 
increasing  curve.  Each  man's  performance  is  measured  by 
the  distance  he  comes  along  the  curve,  while  his  reward  is 
proportioned  to  the  vertical  height  he  climbs.  Increasing 
fatigue  is  thus  met  by  proportionate  reward  for  each  suc- 
cessive effort.  The  normal  result  is  the  training  of  a  num- 


PHILOSOPHIES    OF    LABOR   MANAGEMENT  145 

her  of  men  with  graduated  records,  as  under  the  Halsey 
plan,  but  with  a  tendency  to  collect  the  denser  crowd  near 
the  top,  with  the  line  thinning  out  as  you  go  down  the  scale 
to  the  smaller  and  poorer  performances. 

Omitting  minor  variations  which  are  of  limited  interest, 
the  systems  we  have  now  reviewed  comprise  all  the  well 
recognized  and  distinctly  formulated  wage  systems  properly 
speaking.  There  are,  however,  certain  other  policies  of 
handling  labor  without  particular  stress  on  the  method  of 
paying  wages  which  have  many  strong  and  interesting  char- 
acteristics and  are  worthy  of  notice,  even  in  an  elementary 
review. 

The  first  of  these  is  connected  with  the  name  of  Frank  B. 
Gilbreth,1  a  disciple  and  adherent  of  the  Taylor  doctrine, 
whose  methods  have  been  developed  and  applied  chiefly  in 
connection  with  building  and  general  contracting.  Gilbreth 
maintains  that  not  even  "  time  study  "  is  the  limit  of  ele- 
mentary scientific  analysis  —  that  back  of  that  is  "  motion 
study."  His  best  known  work  has  been  in  the  simplifica- 
tion of  building  operations  by  very  skillful  and  very  inter- 
esting eliminations  of  traditional  but  needless  wastes  of  ef- 
fort or  method.  His  practice  in  handling  labor  is 
characterized  by  four  major  principles :  First,  the  separation 
of  the  work  so  that,  as  far  as  can  possibly  be  managed, 
each  man  works  separately  and  individually  —  that  is,  so 
that  his  separate  individual  performance  can  be  distinguished 
and  measured.  Second,  constant  observation  by  a  sufficient 
force  of  timekeepers  to  record  individual  performance  from 
hour  to  hour.  Third,  conspicuous  and  immediate  posting 
of  these  records  so  that  comparison  between  man  and  man, 
or,  if  unavoidable,  between  gang  and  gang,  can  be  made 
every  shift,  if  not  indeed  every  hour.  Fourth,  reward  of 

1  His  principal  publications  descriptive  of  his  methods  are  "  Brick-Lay- 
ing System,"  Myron  C.  Clark ;  "  Field  System,"  the  same ;  "  Motion 
Study,"  D.  Van  Nostrand  Co. 


146  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

some  kind  (and  experience  shows  that  it  may  be  of  the  most 
varied  kind  so  long  as  it  is  positive  and  conspicuous)  for  the 
best  performance  or  performers,  and  admonition  for  the 
poorest.  In  brief,  it  depends  largely  upon  the  stimulus  of 
emulation,  of  competition,  and  it  consists  essentially  in  pro- 
viding conditions  under  which  emulation  can  work  most 
actively  and  in  providing  prizes,  either  substantial  or  senti- 
mental, to  be  competed  for. 

The  next  to"  be  mentioned  is  the  policy  or  method  con- 
nected with  the  name  of  Charles  U.  Carpenter,1  which  has 
the  following  characteristics:  First,  great  emphasis  is  laid 
upon  a  committee  system,  by  which  officials  responsible  for 
the  prosecution  of  the  work  are  brought  into  frequent  meet- 
ings to  report  upon  existing  conditions  and  to  furnish  esti- 
mates or  commit  themselves  to  agreement  as  to  what  can 
be  accomplished  in  the  immediate  future.  Second,  an  im- 
mediate record  is  made  of  these  reports  and  undertakings, 
usually  on  a  blackboard,  so  that  the  official  goes  down  in 
black  and  white  before  his  fellows,  and  knows  that  the 
record  will  confront  him  at  the  next  meeting.  Third,  this 
system  of  conference  and  consultation,  with  some  attendant 
emulation,  is  carried  down  even  to  assistant  foremen  and 
job  bosses.  Fourth,  a  system  of  individual  reward  by  a 
slight  increase  of  wages  or  small  promotion  is  used  to  en- 
courage and  distinguish  the  man  who  strives  for  and  attains 
more  than  ordinary  efficiency. 

Neither  of  these  systems  is  as  automatic  in  its  action  as  the 
wage  systems  previously  described,  but  both  aim  at  the  same 
purpose,  which  runs  through  all  the  methods  considered  — 
the  restoration  of  individuality  to  the  workman,  who  has 
been  so  largely  unindividualized  by  the  major  tendencies  of 
the  modern  industrial  system. 

Profit-sharing  is   frequently  spoken  or  thought  of  as  if 

1  For  a  full  exposition,  see  his  book  "  Profit  Making  in  Shop  and  Fac- 
tory Management,"  The  Engineering  Magazine. 


PHILOSOPHIES    OF    LABOR    MANAGEMENT  147 

it  were  some  sort  of  wage  system,  and  is  mistakenly  classed 
with  premium  and  bonus  plans. 

It  is  not  naturally  related  to  these  systems,  either  in 
method  of  administration  or  in  philosophy.  It  lacks  com- 
pletely the  individualizing  action,  which,  as  previously  urged, 
is  one  of  the  fundamental  qualities  of  the  premium,  bonus 
and  efficiency  plans  generally.  By  profit-sharing,  as  the 
term  is  now  used,  is  meant  the  policy  of  paying  to  labor,  at 
rather  long  intervals  —  usually  a  year,  although  sometimes 
six  months  or  even  three  months  —  a  dividend  related  in 
some  way  to  the  net  profits  of  the  business  for  the  same 
season.  A  typical  instance  in  this  country  is  that  of  the 
Procter  &  Gamble  Co.  Profit-sharing  has  been  in  effect  in 
the  Ivorydale  factories  for  a  good  many  years,  the  practice 
being  to  pay  to  a  selected  class  of  the  workpeople,  as  a 
dividend,  a  percentage  of  their  wages  equal  to  the  rate  de- 
clared on  the  common  stock  of  the  company.  The  practice 
is  more  widely  used  in  England  than  in  the  United  States, 
perhaps  because  the  piece-rate,  bonus,  and  premium  systems, 
originating  here,  anticipated  the  profit-sharing  system,  and 
already  occupied  the  place  it  might  possibly  otherwise  have 
taken. 

The  difference  in  idea  and  in  operation  scarcely  needs  to 
be  pointed  out. 

In  the  wage  systems  which  we  have  already  discussed, 
the  increased  earnings  are  directly  proportioned  to  the  in- 
creased effort  of  the  workman,  and  are  received  promptly  in 
connection  with  his  regular  payment  for  that  effort.  The 
connection  between  extra  diligence  and  extra  reward  is  in- 
stant and  obvious.  If  a  man  works  hard  he  receives  all  the 
benefit.  If  he  does  not  gain  any  bonus  or  premium  he 
usually  has  only  himself  to  blame.  In  profit-sharing,  the 
dividend  comes  after  the  lapse  of  a  long  period  of  time,  and 
the  conditions  leading  up  to  it  are  more  or  less  obscure.  It 
depends  upon  the  net  earnings  of  the  business,  which  are 


148  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

affected  by  many  elements,  of  which  labor  in  total  is  only 
one,  and  the  work  of  any  single  individual  is  an  extremely 
small  fraction.  The  man  who  has  worked  very  hard  may 
be  disappointed  because  losses  through  bad  debts,  errors  of 
business  judgment,  or  an  unforeseen  change  in  the  markets, 
have  cut  into  the  profits  of  the  concern  and  no  net  earnings 
are  shown.  There  is  too  much  bookkeeping  between  the 
individual  worker  and  the  company's  published  report,  and 
the  man  is  always  inclined  to  think  that  accounts  are  being 
juggled  so  as  to  deprive  him  of  his  dividends.  Lastly,  the 
extra  payment  is  either  divided  among  all  employees,  effi- 
cient and  inefficient  alike,  or  else  the  employees  are  graded 
into  classes,  not  automatically  by  the  inerrant  justice  of  their 
time  and  job  records,  but  arbitrarily  by  the  ruling  of  some 
superintendent  or  foreman. 

Profit-sharing,  therefore,  while  it  is  to  be  respected  as 
an  earnest  attempt  to  harmonize  labor  and  capital,  is 
not  a  very  logical  or  very  successful  attempt.  When  all  is 
said  and  done,  it  has  the  air  of  being  a  sort  of  gratuity  and 
it  is  not  properly  speaking  an  advanced  method  of  wage  pay- 
ment. The  same  thing  seems  to  be  true  in  part  of  the  plan 
for  selling  stock  of  a  corporation  to  the  employees  which 
seems  to  be  finding  favor  nowadays.  There  is  no  neces- 
sary, automatic,  and  manifestly  just  relation  between  an 
employee's  efficiency  or  faithfulness  and  his  ability  to  save 
money  and  invest  in  stocks.  The  most  deserving  man  in 
the  company's  service  may  have  a  large  family,  or  a  sick 
wife,  or  dependent  parents,  and  he  may  have  to  turn  aside 
from  the  opportunity  to  become  an  investor  and  see  it  go  to 
someone  whom  he  knows  (as  perhaps  only  one  workman 
can  know  another)  is  less  worthy.  The  plan  of  course 
creates  a  body  of  employees  whose  interests  are  financially 
interlocked  with  the  interests  of  the  company,  and  to  this 
extent  it  tends  to  "  harmonize  capital  and  labor,"  but  this 


PHILOSOPHIES    OF    LABOR    MANAGEMENT  149 

body  is  necessarily  small  and  is  not  necessarily  formed  on 
logical  lines. 

Before  leaving  the  subject  of  labor,  it  is  expedient  to 
say  something  upon  an  aspect  of  the  treatment  of  labor  in 
industrial  plants  which  has  recently  been  advanced  promi- 
nently into  public  view.  This  is  what  is  generally  known 
as  betterment  or  welfare  work,  and  it  covers  all  sorts  of 
institutions  for  the  hygiene,  comfort,  pleasure  and  instruc- 
tion of  the  workers.1  These  institutions  are  outside  of  con- 
tract relations  between  employer  and  employee,  but  installed 
or  promoted  by  the  employer  with  motives  in  which  altruism 
and  enlightened  selfishness  are  compounded  in  various  pro- 
portions. Usually  it  is  frankly  admitted  that  the  purpose 
is  to  provide  a  healthy  physical  and  moral  atmosphere  in 
which  the  employee  may  naturally  develop  his  highest  effi- 
ciency, to  make  conditions  so  pleasant  that  good  men  will 
naturally  incline  to  remain  permanently  in  the  service  rather 
than  to  rove,  and  to  establish  a  feeling  of  friendliness  and 
good  will  to  which  the  employee  will  respond  by  willing 
loyalty  to  his  work  and  his  employer. 

There  is  great  diversity  in  opinion  as  to  how  far  work 
of  this  kind  may  advantageously  go.  Comparatively  few 
years  ago  there  was  generally  very  great  indifference  on  the 
part  of  manufacturers  as  to  the  physical  well-being  of  their 
workpeople,  and  conditions  of  light,  heat,  ventilation  and 
sanitation  were  often  completely  ignored.  While  the  newer 
movement  has  gone  to  perhaps  extravagant  extremes  in  cer- 
tain cases,  there  is  no  doubt  whatever  that  it  has  exercised 
an  excellent  influence  in  awakening  shop  managers  to  a 
realization  that  employees  should  be  surrounded  with  condi- 
tions of  ordinary  decency  and  comfort  at  least,  and  that  the 
money  so  expended  yields  large  return  in  improved  output 

1  A  very  large  number  of  examples  are  assembled  in  "  Social  Engineer- 
ing," by  Dr.  W.  H.  Tolman,  McGraw-Hill  Book  Co. 


150  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

and  quality  of  work.  One  of  the  ablest  works  managers 
I  ever  knew  used  to  say:  "  We  must  give  the  workmen  a 
comfortable  shop,  well  lighted,  well  ventilated,  warmed  if 
necessary  to  a  point  comfortable  for  physical  exertion;  we 
must  give  him  a  place  to  change  his  clothes,  to  wash  with 
proper  regard  for  his  individual  self-respect.  We  must 
have  well  kept  lavatories  and  sanitary  conveniences.  Why 

—  because  we  love  the  workman?     No,  but  because,  like 
all  other  machines,  he  works  best  when  he  is  kept  in  the 
best  condition."     This  is  a  very  utilitarian  statement,  and 
perhaps  it  expresses  the  lowest  limit  to  which  welfare  work 
should  certainly  go.     It  must  be  admitted  that  where  con- 
ditions of  peculiar  discomfort  are  attendant  upon  the  work 

—  conditions  which  the  employee  alone  is  unable  to  remedy 

—  the  employer  may  well  go  to  considerable  length  in  over- 
coming them  or  in  supplying  offsetting  comforts.      I  noticed 
recently  in  a  trip  over  the  Santa  Fe  road  l  that  reading  and 
recreation   rooms   at   division   points,   especially   across   the 
desert,  were  throngingly  patronized  by  the  men.     The  outfit 
was  very  simple;  merely  a  couple  of  rooms  with  plain  tables 
and  chairs,  the  principal  monthly  and  weekly  magazines, 
and  dailies  from  the  larger  cities  along  the  road;  oppor- 
tunities  for  playing  cards,   checkers   or   other   games,    and 
perhaps  a  piano.     At  larger  points  they  might  have  a  bil- 
liard table  or  a  bowling  alley.     Unquestionably,   in  those 
crude  desert  towns,  devoid  of  any  other  wholesome  interest, 
the  Santa  Fe  reading  rooms  were  not  only  a  strong  force  for 
law,  order,  and  morality,  but  also  a  great  advantage  in  keep- 
ing men  from  that  extreme  of  discontentment  which  would 
have  made  them  a  fickle  and  unreliable  class  of  employees  in 
the  service  of  the  road. 

Beyond  this  we  might  go  with  hesitation.     There   are, 
however,   a   number  of  companies   and  corporations   which 

1  See  "Methods  of  the  Santa  Fe,"  by  Charles  Buxton  Going;  The  En- 
gineering Magazine. 


PHILOSOPHIES    OF    LABOR    MANAGEMENT  151 

have  attracted  wide  notice  by  a  series  of  provisions  for  com- 
fort, instruction,  and  recreation  of  their  workpeople  both 
in  and  out  of  working  hours.  It  would  be  rash  to  claim  an 
ability  to  speak  the  final  word  on  the  question,  but  under 
average  American  conditions,  it  is  probably  best  for  both 
employer  and  employee  to  rest  content  with  the  lower  limit 
herein  suggested  —  that  is,  thorough,  honest,  earnest  at- 
tention to  intra-plant  conditions  of  hygiene  and  safety  — 
accompanying  a  mode  and  scale  of  payment  which  enables 
the  employee  to  realize  the  largest  earnings  possible  to  his 
capacity. 


MATERIALS 


CHAPTER  IX 
MATERIALS 

IN  a  preceding  chapter  we  assumed  the  manufacturer's 
point  of  view,  from  which  every  proposition  in  produc- 
tion is  divisible  into  three  terms:  materials,  labor  and  ex- 
pense. In  a  more  detailed  examination  of  these  three  di- 
visions of  cost,  we  have  reversed  this  order  and  have  studied, 
first,  expense,  then  labor,  and  lastly  we  come  to  materials. 
The  reason  for  inverting  the  sequence  by  which  the  actual 
things  would  appear  in  practice,  is  that  the  justifying  reasons 
for  many  of  the  wage-paying  methods  and  broader  indus- 
trial policies  become  clear  only  after  we  realize  clearly  the 
peculiar  characteristics  of  the  expense  account  and  its  shift- 
ing ratio  to  the  other  costs  of  production  —  its  decreasing 
relative  importance  as  the  volume  of  production  rises,  and 
the  consequent  desirability  of  stimulating  production  through 
increased  efficiency  of  labor,  even  at  a  considerable  increase 
of  labor  cost.  Labor  was  taken  up  next  so  that  the  tenden- 
cies of  the  various  wage  systems  might  be  measured  in  the 
closest  possible  connection  with  the  problem  of  costs.  We 
come  now  to  material,  which,  on  account  of  its  passive, 
inert  character,  seems  best  able  to  suffer  the  delay  and  seems 
also  perhaps  to  offer  less  opportunities  for  profitable  study. 
Yet  there  is  an  aspect  of  material  which  we  may  advan- 
tageously consider  for  the  moment,  with  the  purpose  of 
increasing  our  respect  for  it.  If  you  trace  almost  any 
material  thing  back  to  its  ultimate  sources,  you  will  find  that 
a  very  large  fraction  of  its  entire  value  comes  from  the  labor 
that  has  been  expended  upon  it.  In  other  words,  almost 
all  manufactured  material,  and  even  a  good  deal  of  what 

155 


156  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

would  be  classed  by  manufacturers  as  raw  material,  is  crys- 
tallized labor.'  The  ore  in  the  ground,  the  timber  in  the 
forest,  the  seed  in  the  soil,  even  the  land  itself,  is  of  small 
worth  until  the  work  of  men's  hands  and  brains  has  been 
expended  upon  it.  But  at  each  stage  of  the  processes  through 
which  it  passes,  the  labor  of  all  the  preceding  stages  is  to 
be  found  literally  materialized  and  embodied  permanently 
in  the  partly  finished  product.  What  was  "  labor  "  to  the 
preceding  workman  has  become  "  material "  to  the  follow- 
ing one. 

Take  the  case  of  flax.  The  cost  of  the  seed  ready  to 
sow  is  largely  that  of  the  labor  it  took  to  grow  it.  The 
crop  of  fibre  fit  for  spinning  adds  to  that  the  value  of  the 
work  of  cultivating,  pulling,  threshing,  retting,  hetcheling; 
in  the  spun  thread  a  further  increment  of  price  appears,  cor- 
responding to  the  work  of  spinning;  the  woven  linen  is  more 
valuable  still  by  the  measure  of  the  labor  of  the  weavers 
and  the  looms.  Yet  with  all  this  "  labor  "  accumulated  in 
it,  the  linen  is  "  raw  material  "  to  the  shirt-maker.  It  is  so 
again  even  more  evidently  perhaps  with  the  ascending  scale 
of  values  in  the  materials  fashioned  into  an  engine  or  ma- 
chine; probably  a  small  fraction  of  one  per  cent  of  the  market 
price  represents  the  ore  in  the  ground  from  which  they  were 
made. 

By  "  labor  "  of  course  we  understand  labor  of  adminis- 
tration and  direction  —  labor  of  brain  —  as  well  as  manual 
effort,  and  we  do  not  purpose  to  ignore  the  successive  addi- 
tions of  profit.  Making  these  allowances,  however,  if  we 
take  the  entire  range  of  the  history  of  almost  any  product 
or  manufacture,  we  shall  find  that  direct  or  indirect  labor 
accounts  for  nearly  all  its  value. 

This,  however,  is  a  general  argument,  and,  like  a  general 
rule,  it  may  be  of  no  particular  service  in  a  particular  case. 
In  any  particular  problem  of  production  or  industrial  opera- 
tion with  which  we  are  directly  concerned,  the  relative  im- 


MATERIALS  157 

portance  of  material  as  compared  with  labor  or  expense  may 
be  large  or  may  be  small.  We  are  not  particularly  con- 
cerned with  the  history  of  the  material  before  it  came  to  us, 
except  so  far,  perhaps,  as  that  may  influence  its  quality. 
We  are  a  good  deal  concerned  with  its  relative  value  in  our 
own  special  formula : 

Materials  +  Labor  +  Expense  =  Manufacturing  Cost. 

There  are  enormous  differences  in  the  relative  weight 
these  three  variables  assume  in  this  formula  as  it  is  applied 
to  various  lines  of  manufacture.  If  our  business  is  that  of 
a  heavy  foundry  or  of  steel  structural  work,  materials  may  be 
by  far  the  most  important  account  to  us,  while  labor  takes 
a  comparatively  small  part  in  our  total  costs.  In  an  ordi- 
nary machine  shop,  the  expense  of  fuel  used  in  the  power 
plant  and  the  efficiency  of  the  engine  driving  the  shop  may 
not  cut  a  large  figure  in  the  total  result;  the  important  con- 
sideration here  is  to  secure  the  highest  efficiency  from  the 
workers  and  from  the  expensive  mechanical  plant  (that  is, 
from  the  machine  and  other  labor)  so  as  to  turn  out  the 
maximum  product;  fuel  expense  is  but  a  small  fraction  of 
the  total  expense  burden  which  the  product  must  bear.  But 
in  a  central  station  selling  power  or  light,  the  cost  and 
quality  of  the  fuel  and  the  efficiency  of  the  engines  are  of 
prime  importance,  for  coal  has  now  become  the  raw  ma- 
terial, and  the  engines  and  boilers  are  the  machinery  turn- 
ing out  the  product  —  that  is,  kilowatts  at  the  switchboard 
—  while  labor  is  a  relatively  small  item.  Again,  if  you  are 
furnishing  insurance,1  material  practically  disappears  as  an 
element  of  cost,  and  the  account  to  which  the  highest  and 
most  skilled  attention  must  be  directed  is  that  of  risk. 

The  point  deserves  emphasis.     It  is  not  merely  curious 

1  For  purposes  of  emphasis,  I  have  borrowed  an  illustration  from  James 
Newton  Gunn.  But  in  strict  analogy,  the  "  Material "  used  by  an  in- 
surance company  is  credit,  and  is  by  no  means  inconsiderable. 


158  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

or  fantastic.  It  is  not  an  idle  play  upon  the  interest  of  the 
theme  to  draw  illustrations  from  an  extreme  case.  The  very 
first  necessity  in  addressing  ourselves  to  any  problem  of 
works  management  is  to  get  a  clear  analysis  of  the  situation, 
and  this  analysis  must  be  not  merely  qualitative  but  quantita- 
tive. We  must  find  the  absolute  and  the  relative  weights  of 
all  the  elements  involved.  Then,  by  comparison  with  stand- 
ards, we  can  see  clearly  where  the  work  of  betterment  will 
yield  the  largest  results.  We  can  attack  the  thing  which  is 
most  important  first,  and  work  from  the  greater  to  the  less. 

Material  (or  as  it  is  commonly  called  in  shop  language, 
"  stores  "  when  unfinished  and  "  stock  "  when  finished)  is 
of  course  the  central  interest  about  which  the  whole  organi- 
zation of  the  plant  is  built  up.  Expensive  machinery  is 
installed  to  fashion  it;  workmen,  skilled  and  unskilled,  are 
hired  to  operate  upon  it;  shop  transportation  systems  are 
provided  to  handle  it;  it  is  the  beginning  and  the  end  of 
the  whole  scheme  of  manufacture  —  the  solid,  physical 
nucleus  upon  which  added  value  is  built  up  by  the  various 
operations.  It  enters  perhaps  in  crude  and  inexpensive 
form.  It  moves  through  the  factory,  gathering  to  itself, 
as  it  were,  the  values  of  men's  time,  of  machine  hours,  of 
interest  on  investment  in  plant  and  equipment,  of  skilled 
superintendence  and  management.  It  emerges  with  all 
these  incorporeal  values  of  time  and  work  and  skill,  ma- 
terialized and  incorporated  in  the  finished  stock.  The  in- 
crement may  be  one-tenth  of  the  original  cost  or  one 
hundred  times  that  cost;  it  is  evidently  more,  for  example, 
in  the  case  of  the  hair  spring  of  a  watch  than  it  is  in  the 
case  of  a  common  grate  bar;  but  there  it  is,  crystallized  in 
the  completed  work. 

This  value  is  rendered  fluid  again,  so  far  as  the  plant 
creating  it  is  concerned,  by  sale  —  that  is,  by  exchange  of  the 
finished  stock  for  money,  with  which  more  crude  material, 
time,  work  and  skill  may  be  purchased. 


MATERIALS  159 

Looked  at  in  this  way,  material  appears  to  be  a  matter 
of  great  importance,  not  only  in  itself,  but  in  its  relations 
to  the  sometimes  larger  elements  of  labor  and  expense.  If 
stock  is  accumulated  in  excess  of  reasonable  provision,  it 
means  at  least  idle  capital,  probable  inconvenience  and  added 
expense  in  the  ordinary  movement  of  work,  and  possibly 
total  loss  through  some  change  of  plans,  methods  or  pat- 
terns. If  stores  run  short 'on  even  one  item,  it  may  mean 
stagnation  to  a  whole  group  of  manufactures  thus  left  in- 
complete, and  it  may  cause  forced  and  expensive  idleness  to 
a  whole  department. 

Stock,  therefore,  is  really  in  a  sense  more  important  than 
the  money  it  represents,  for  it  has  more  potential  energy  for 
harm  or  for  good.  Yet  it  is  notorious  that  many  industrial 
plants  (it  might  almost  be  said  most  industrial  plants)  are 
exceedingly  lax  in  supervision  and  administration  of  the 
stock  department  or,  as  it  is  more  often  called,  stores  de- 
partment. They  are  strenuously  careful  of  the  dollar  in 
the  safe,  and  flagrantly  careless  of  the  dollar  in  the  stock 
bins.  In  short,  it  has  often  been  remarked  that  stores- 
keeping  is  a  very  backward  branch  of  works  management. 
It  has  not  in  general  received  the  same  careful  study,  the 
same  skillful  work  for  betterment  of  efficiency,  that  has  been 
put,  for  example,  upon  the  question  of  labor.  Stores- 
keeping  methods  are  therefore  likely  to  be  found  relatively 
inefficient,  and  for  this  reason  might  afford  a  very  interest- 
ing field  for  study  because  there  is  more  opportunity  to  se- 
cure economically  important  results. 

In  an  outline  so  general  as  this  we  need  not  go  far  into 
the  details  of  the  subject,  but  we  may  summarize  certain 
principles  found  advantageous  in  systematic  handling  of 
materials  in  manufacturing  establishments. 

Purchase  is  a  specialized  function  in  itself,  and  as  we  noted 
in  a  preceding  chapter  is  committed  to  a  purchasing  agent, 
with  such  departmental  assistance  as  the  magnitude  of  the 


l6o  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

business  may  demand.  The  purchasing  agent  does  not  act 
on  his  own  initiative,  but  on  orders  from  the  manufacturing 
department,  often  transmitted  through  the  stores  depart- 
ment. The  duty  of  the  purchasing  agent  is  to  see  that 
materials  of  the  proper  description  are  ordered  from 
sources  that  best  meet  the  important  conditions  of  quality, 
price,  and  time  of  delivery;  he  must  then  follow  up  the  pur- 
chase order  until  the  goods  are  received  and  quantity  and 
quality  verified.  The  material  passes  then  to  the  stores- 
keeper,  the  invoices,  properly  certified,  go  to  the  auditor, 
and  the  purchasing  agent's  duties  as  to  that  particular  trans- 
action are  finished.  The  most  important  equipment  for  the 
purchasing  agent  is  thorough  knowledge  of  the  trades  he  has 
to  deal  with,  supplemented  by  systematically  filed  catalogues, 
and  authoritative  information  as  to  market  quotations. 

When  it  has  been  received  at  the  works,  material,  as  we 
have  already  seen,  passes  into  the  custody  of  the  stores  de- 
partment. The  chief  functions  of  this  department  are  four. 
First,  it  anticipates  or  meets  the  material  wants  of  the  fac- 
tory, by  securing  the  requisite  supplies  through  the 
purchasing  agent.  Second,  it  receives  and  verifies  the  ma- 
terial when  delivered,  and  provides  for  its  orderly  safe- 
keeping. Third,  it  issues  material  as  needed  for  the 
operations  of  the  manufacturing  department  and  receives  it 
again  in  the  finished  state  ready  for  shipment.  Fourth,  it 
maintains  exact  records  of  every  receipt  and  issue  and  of 
balances  remaining  on  hand. 

In  the  performance  of  these  duties  an  effective  stores 
system  should  accomplish  at  least  four  things : 

First.  It  should  prevent  over-investment  and  un- 
balanced accumulation.  Of  course,  an  extraordinary  pur- 
chase to  secure  advantage  of  special  market  conditions, 
although  leading  to  a  temporary  over-investment  or 
overbalance  of  some  item  of  stores,  might  yet  be  very  wise. 


MATERIALS  l6l 

This  is  an  obvious  exception  which  common-sense  would 
suggest. 

Second.  It  should  give  automatic  warning  of  approach 
to  a  minimum  on  any  item,  so  that  the  danger  may  be 
averted  by  filling  up  the  low  points. 

Third.  It  should  provide  effective  means  for  getting  the 
material  through  the  factory  rapidly  and  without  delays, 
even  up  to  the  final  delivery 'of  the  finished  stock. 

Fourth.  It  should  furnish  records  of  every  delivery,  so 
that  each  order  can  be  traced  and  identified  with  the  job  and 
with  the  workmen,  and  so  that  every  part  or  piece  may  be 
accounted  for  and  a  continuous  inventory  of  stock  on  hand 
may  be  obtainable. 

It  is  apparent  that  these  requirements  connect  the  stores 
department  very  closely  with  the  purchasing  department  on 
the  one  side,  with  the  cost  department  throughout,  and  with 
the  shipping  department  on  the  other  side.  Under  able 
and  energetic  administration,  indeed,  it  may  be  made  (and 
in  some  modern  institutions  it  is  being  made)  not  simply 
a  bureau  of  custody  and  record,  but  a  leader  and  a  driver  of 
the  manufacturing  superintendents  and  the  operating  officers. 
Even  though  it  have  no  executive  authority  over  manufac- 
tures, it  can  and  it  should  disclose  delays,  inefficiencies, 
irregularities,  and  extravagances  and  bring  them  to  the 
attention  of  the  executives  for  correction. 

So  much  for  the  functions  of  the  stores  department.  As 
to  its  organization  and  conduct,  also,  we  may  define  a  very 
few  prominent  features  which  appear  to  advantage  in  some 
of  the  most  advanced  systems  now  in  successful  operation. 

The  first  of  these  is  the  standardized  listing  of  all  standard 
stores,  establishing  standard  nomenclature  for  every  item. 
The  use  of  symbols  may  be  advisable,  and  in  some  cases 
dimensional  figures  and  sketches  in  the  standard  lists  may  be 
expedient. 


1 62  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

The  second  is  the  systematic  and  accessible  arrangement  of 
all  stores  —  heavy  stock,  on  the  ground  or  on  floors,  lighter 
parts  in  bins  or  on  shelving.  Every  section  or  item  should 
be  identified  by  a  descriptive  card  or  tag,  properly  displayed. 

It  is  not  essential  that  all  material  should  be  in  one  central 

% 

storehouse.  It  may  be  of  great  advantage  to  have  heavy 
stores,  especially,  delivered  and  stored  near  to  the  point  of 
use,  and  to  have  sub-stores  where  they  will  save  the  time  of 
long  journeys  to  and  fro  with  requisitions  and  deliveries  of 
stores  to  fill  them.  All  the  lighter  and  more  valuable  pieces, 
however,  should  be  actually  and  physically  contained  in  a 
store-room,  and  it  is  highly  advantageous,  when  possible,  to 
have  a  standard  arrangement  so  that  all  sub-stores  repeat 
the  features  of  the  main  storehouse.  All  stores  and  stock 
should  be  under  the  charge  of  a  storekeeper  and  every  is- 
sue should  be  only  upon  regular  requisition  from  proper 
and  responsible  authority. 

Third.  Careful  and  immediate  record  should  be  made 
of  every  withdrawal  from  stores  and  of  every  addition  to 
every  item,  either  in  stock  books  or  other  permanent  forms 
of  record,  or  on  the  cards  attached  to  the  bins,  or  both,  and 
the  stock  books  may  advantageously  follow  the  classification 
system  and  arrangement  of  the  stock  bins. 

Fourth.  Carefully  determined  high  and  low  limits 
should  be  fixed  for  every  item  kept  in  stock.  Their  size 
and  range  must  depend,  of  course,  on  the  rate  at  which  each 
item  is  used  and  the  length  of  time  necessary  to  get  a  new 
supply.  Provision  should  then  be  made  to  have  a  replace- 
ment order  put  in  whenever  any  item  falls  to  the  minimum, 
so  that  a  new  supply  may  be  bought  or  manufactured. 
Generally  speaking,  when  an  item  has  fallen  to  a  minimum, 
a  replacement  order  for  the  maximum  quantity  or  a  large 
percentage  of  it  is  put  in,  the  minimum  being  fixed  at  such 
a  point  that  it  will  last  until  the  new  lot  is  received,  allow- 
ing a  reasonable  margin  of  safety  for  contingencies. 


MATERIALS  163 

It  is  evident  that  special  knowledge  and  talent,  and  skilled 
knowledge  and  discretion,  are  necessary  in  standardizing  the 
elements  of  stores,  in  designing  the  arrangement  of  the 
stores  rooms,  and  in  determining  maximum  and  minimum 
limits;  but  after  that  the  routine  becomes  mechanical,  and 
the  ordinary  functions  of  operating  the  system  are  merely 
clerical.  In  other  words,  we  have  here  the  same  idea  that 
has  already  been  alluded  to  in  connection  with  mechanical 
manufacture  —  the  skill  of  the  exceptional  genius  is  perma- 
nently built  into  the  machine  or  system,  and  the  routine  of 
the  repetitive  movements  of  that  machine  or  system  can  be 
supervised  by  the  cheaper  intelligence  and  the  lower-priced 
labor  of  the  machine  tender,  or  clerk,  without  fear  of  any 
deterioration  in  the  quality  of  the  product. 

The  actual  movement  of  material  —  that  is,  shop  trans- 
portation —  is  of  course  an  expense  account,  and  we  met 
it  when  we  were  considering  the  distribution  of  expense;  the 
discussion  of  the  physical  means  for  accomplishing  such  work 
belongs  to  the  study  of  manufacturing-plant  design  and  shop 
transportation  rather  than  to  this  examination  of  the  ele- 
ments of  management.  The  transportation  of  material,  how- 
ever, is  so  intimately  associated  with  storeskeeping  that  it 
should  be  noted  here  that  very  important  influences  on 
economy  may  be  exerted  by  the  arrangement  and  the  ap- 
pliances adopted.  In  general,  economy  is  favored  by 
orderly  progress  of  material  in  one  direction  through  the 
works,  the  transportation  lines  of  the  various  pieces  or  parts 
from  the  stores  department,  through  the  manufacturing 
operations,  gradually  drawing  together  in  the  order  of  as- 
sembly. This  ideal,  however,  becomes  more  and  more 
difficult  to  realize  practically  as  our  finished  product  be- 
comes more  and  more  complicated,  and  in  many  cases  only 
an  approximation  to  the  ideal  can  be  secured.1 

1  For  an  excellent  treatment  of  this  subject  see  "  Industrial  Plants ;  their 
Arrangement  and  Construction,"  by  Charles  Day;  The  Engineering  Mag- 
azine. 


164  PRINCIPLES    OF    INDUSTRIAL    ENGINEERING 

Material  and  the  transportation  of  material  are  further- 
more very  important  in  that  they  may  dictate  the  location, 
and  must  control  the  design,  layout,  and  equipment  of  the 
plant.  To  a  very  great  extent,  also,  they  will  determine 
the  selection  of  personnel,  the  form  of  organization,  and 
probably  the  manufacturing  policy. 

Take,  for  instance,  the  case  of  a  soap  works.  We  shall 
have  here  the  problem  of  a  converging  flow  of  materials  to 
the  kettle  house,  and  from  thence  a  stream  of  solid  product 
to  the  shipping  platforms.  Up  to  the  point  of  its  solidifica- 
tion in  the  frames,  our  material  is  almost  all  fluid,  is  handled 
at  very  little  expense  by  pumping,  and  allows  great  elasticity 
of  arrangement. 

Contrast  with  this  the  problem  of  the  shipyard,  which  is 
fundamentally  putting  overboard  an  enormously  heavy  unit 
of  product.  Everything  must  be  subservient  to  the  location 
of  the  shipways;  our  material  is  almost  all  in  heavy  pieces, 
requiring  heavy,  fixed  transportation  systems,  and  the  whole 
scheme  is  extremely  rigid. 

If,  again,  we  have  to  deal  with  the  manufacture  of  type- 
writers or  cash  registers,  or  some  such  light  mechanical 
product  turned  out  largely  on  automatic  machinery,  our 
problem  is  the  accurate  manufacture  of  enormous  numbers 
of  very  small  parts,  their  orderly  convergence  to  sub-centers 
of  assembling,  and  final  assembling  of  the  group  parts  into 
the  finished  machine.  We  should  doubtless  install  such  a 
manufacture  in  buildings  of  very  good  class,  well  lighted  and 
well  equipped,  to  attract  a  desirable  grade  of  labor,  with 
close  communication  between  the  various  departments. 

Lastly,  if  we  are  interested  in  powder-making,  the  con- 
dition which  dominates  the  whole  installation  is  that  of  pos- 
sible explosion,  and  our  ideal  is  ,a  plant  widely  scattered  into 
small  units,  none  of  them  large  enough  to  do  disastrous 
harm,  housed  in  buildings  so  light  that  they  can  blow  to 


MATERIALS  165 

pieces  without  throwing  heavy  fragments,  and  isolated  by 
natural  or  artificial  barriers. 

Here,  then,  as  elsewhere  in  the  manufacturing  problem, 
we  see  that  while  our  purposes  are  fixed,  the  means  by  which 
those  purposes  are  reached  must  vary  with  each  particular 
case  or  each  particular  class  of  cases,  and  the  first  and  great 
essential  to  success  is  intelligent  survey  of  our  conditions, 
and  then  the  application  of  scientific  knowledge,  intelligent 
methods,  plain,  practical  common-sense  to  the  provision  of 
means  for  meeting  them. 


THE  END 


INDEX 


INDEX 


Assays  of  cost  data 4 

Association;    joint-stock 64 

Auditor ;   functions  of 54 

Aggregation;    a    result    of    the 
introduction      of 

machinery 20 

economic  condi- 
tions favoring 

its    increase 21 

"  psychologic       in- 

fluences favoring 

its    increase 22 

how  interlocked 
with  specializa- 
tion and  stand- 
ardization    31 

B 

Bonus  system;  the  Gantt 135 

"        the  Emerson  . .   142 


Capital  of  a  corporation 69 

Capitalization    65 

Carpenter's  labor  policies 146 

Centralization ;     see     Aggrega- 
tion. 

Class  rates 34 

Collective    bargaining 35,  1 18 

Commercial    expense 84 

Commercial  factor  in  industrial 

progress    13 

Competition  8 

waste   caused  by. .  9 

Constant    expense 88 

Contract  plan  of  wage  payment,  125 
Control  of  a  corporation;  how 

determined   68 

Corporation;  advantages  of,  as 
a  form  of  indus- 
trial  organization  69 
"             continuous    exist- 
ence   of 69 

"             control  of 68 

directors    of 67 


169 


Corporation ;    holding    71 

limitations  of  ac- 
tivities   of 65 

management  of . .  67 
minority       rights 

in    68 

"  nature    and    legal 

status    of 64 

stock  control  of.  68 

"             subsidiary    70 

Cost    as    a    test    of    industrial 

operations     7 

Cost  department;   functions  of,  55 

Cost    diagram 83 

Cost  finding;  chief  object  of.,  no 
Cost    of    production ;    its    influ- 
ence on   demand 13 

D 

Day  wages 117 

Demand   and   supply  not   fixed 

quantities    13 

Depreciation    106 

ethical  aspects  of,  109 
rules    for    deter- 
mining       108 

Design   of   plant   largely    influ- 
enced by  nature  of  materials,  164 
Differential     piece      rate;     the 

Taylor 133 

Directors  of  a  corporation....     67 

Dispatching  of  work 53 

Distribution    of    expense ;    im- 
portance  of   correct 82 

what  it  signifies 82 

Distribution  of  general  expense,  106 
Distribution  of  shop  expense..     97 
"    cardinal    meth- 
ods   of 97 

"   by    machine 

hours    100 

"    by  man  hours.     99 

"    by  material 97 

"    by      percentage 

on  wages 98 

"by     production 
factors    103 


i  yo 


INDEX 


Dividends  7° 

Domestic   industries 20 


Economic  conditions;  their  im- 
portance to  industrial  ad- 
vance    12 

Efficiency    as    an    influence    in 

cost  reduction 9 

dependent     on     the 

individual   45 

how  attained 10 

of  workers  depend- 
ent on  hygienic  con- 
ditions . . . . '. 150 

system,  Emerson's. .   140 
the   Twelve    Princi- 
ples   of 49 

wages  proportioned 
to  —  would  de- 
crease strikes 116 

Emerson  efficiency  system 140 

Emerson's  practice  summarized    48 

Engineering  department 75 

Equivalency  between  expendi- 
ture and  results 7 

Executive  Committee  of  a  cor- 
poration    68 

Expense  account ;  items  charged 

to 85 

Expense  an  elusive  variable  ....     86 
constant  and  variable.     87 
determination    compli- 
cated   by   diversity   of 

product     84 

"        fundamental     problem 

of 82 

mathematically  accu- 
rate distribution  im- 
possible    94 

method  of  distributing 

general  105 

origin  and  varying  in- 
cidence illustrated....  91 

ratio    89 

subdivisions    of 84 

what  it  is 80 

Expense  Distribution ;  cardinal 
methods 
of    ....     97 
by    ma- 
c  h  ine 
rates  . .   100 
by  man 
hours    .     99 


Expense    Distribution;  by    ma- 
terial . .     97 
by   per- 
c  e  n  t- 
age    on 
wages  .     98 
by  pro- 
duction 
factors,    103 

Expense-Labor   81 

Expense-Material    81 


Factors  of  production 103 

Factory    expense 84 

Finished  stores 52 

Finished-stores    department....  72 

Firm  or   Partnership 61 

Fixed  capital 69 

Fixed    expense 88 

Foreman ; .  deficiencies  of  aver- 
age      44 

Functional    management 48 


Gantt  bonus  system 135 

General    expense 84 

"      principal    com- 
ponents of. . . .  105 
method  of  dis- 
tributing      106 

Gilbreth's   labor  policies 145 

"Graphs;"  their  effectiveness.  4 

H 

Halsey  premium  plan,  126,  138,  139 

Holding  companies 71 

Hygienic  conditions  a  factor  in 

efficiency  150 

I 

Ideals;  their  essential  function,     16 
Incentive  a  factor  of  scientific 

management 46,  134 

Incorporation  ;  articles  of 64 

Individual  efficiency  not  deter- 
mined under  ordinary  man- 
agement methods 34 

Individual-effort    system 140 

Individual  intelligence  the 
foundation  of  successful  in- 
dustry   36 

Individuality;  workman  loses 
it  under  manufacturing  sys- 
tem   34 

Individual   proprietorship 59 


INDEX 


171 


Industrial   Engineer;  necessary 

equipment  of 5 

Industrial  Engineering  defined.  I 
differen- 
tiated 
'from 
other 
branch- 
es    3 

«  "  has    an- 

alytical 
and  syn- 
thetic 
phases  .  4 
most 
i  mpor- 
tant  ele- 
ments 
of  ....  5 
organi- 
zation; 
how  it 
differs 
from 
common 
type  ...  46 

Industrial  operations;  Cycle 'of,      2 
Industrial     ownership ;      forms 

of    59 

Instruction  of  workmen  a  fea- 
ture of  scientific  manage- 
ment   46,  134,  138 

Inventions  introductory  to  the 
manufacturing  sys- 
tem    II 

success  dependent 
on  commercial  and 
economic  c  o  n  d  i- 

tions    12 

success  dependent 
o  n  psychological 

conditions    14 

their  influence  mis- 
construed 12 


Job  numbers 53 

Jobs;   disindividualizing  of....  35 

Job  ticket 72 

Joint  partnership 61 

Joint-stock    association 64 


Labor ;  cause  of  loss  of  individ- 
ual relations  with 115 

"       elementary  problems  of,    82 


Labor ;  loss  of  incentive  to  effi- 
ciency of 116 

proportionate    influence 

on  costs 113 

systematic  handling  of.  52 

Labor  Unions  inevitable 23 

their  evils  partly 

transitory    24 

Liability  of  individual  owner..  59 
4    partner  in  firm....  62 
'    stockholder  in  cor- 
poration      67 

Line  and  staff  contrasted 43 

Line    organization 42 

;    defects    of 
ordinary,  44 
45 


M 

Machine-hour    method    of    ex- 
pense  distribution 100 

Machine-hour    rates;    how    de- 
termined      101 

Machinery ;    aspects    important 

to  the  Industrial  Engineer...       5 
Machine  tenders  replacing  me- 
chanics         31 

Management  depends  for  suc- 
cess o  n  knowl- 
edge o  f  human 

nature  15 

Carpenter's    poli- 
cies of 146 

Emerson's  philos- 
ophy of 48,  148 

Gantt's      philoso- 
phy  of 135 

Gilbreth's  policies 

of 145 

"            of  a  corporation.     67 
philosophies   of. .  133 
scientific  and  un- 
scientific       47 

task  idea  of.  .136,  139 
Taylor    system 

of    47,  133 

Man-hour  method  of  distribu- 
ting  expense 99 

Manufacturing  Expense 84 

Manufacturing;  the  cycle  of..  79 
Manufacturing  System;  factors 
in  de- 
velop- 
ment 
of  the,  10 


172 


INDEX 


Manufacturing  System;  origin 

of  the,    n 

reflex 

in  fl  u- 

ences 

of  the,     19 

Mass   production 30 

Materials    155 

as    a   basis    for    ex- 
pense distribution. ..     97 
aspects  important  to 
the    industrial    engi- 
neer         6 

"          elementary  problems 

of 82 

represent  crystallized 

labor   156 

records  of 52 

relative     importance 
in     the     industrial 

formula    157 

the  solid  nucleus  of 

industrial  value 158 

systematic  care  of..     51 

162 

Markets   as  an  industrial-engi- 
neering problem 6 

Maximum  and  minimum  limits 

in   stores   keeping 162 

Mechanics     displaced    by    ma- 
chine tenders 31 

Methods;    their   importance   to 

the  industrial  engineer 6 

Military  organization 41 

Minority    rights    in   a   corpora- 
tion       68 

Money  as  a  gauge  of  other  in- 
dustrial-engineering elements,      6 
Money ;  supervision  of 54 

N 

Numbering    of    production    or- 
ders and  job  tickets 73 

0 

Organization    defined 41 

functional    48 

fundamental  prin- 
ciples of 41 

line  and  staff. ...     43 

military    41 

th  r  ee-column 

form  of 50 

what  i  t  s  effi- 
ciency depends 
on 41 


Over-standardization ;  s  t  a  g- 
nating  effects  of 32 

Ownership;  forms  of  indus- 
trial    59 


Partnership    relations    and    re- 
sponsibilities         61 

special   63 

Penalized  job;  problem  of  the.   102 
Philosophies  of  Management.  .   133 

Piece   rates 117,  120 

"     Taylor    differential.    133 
Piece-rate    system ;    advantages 

of    124 

defect     of 
principle  in  123 

»  *  '       "  "         illustration 

of        the 
weakness 

of    120 

Power-plant   as    a    factor   con- 
trolling    size     of     industrial 

unit    20 

Premium  plan ;  Halsey,  126,  138,  139 

Rowan  128 

Principles     of     Efficiency ;     the 

Twelve    49 

Production  centers 104 

;  cost    of    influences 

volume  of  demand     13 
Production-Factor    Method    of 

expense  distribution 103 

Production  factors;  how  deter- 
mined      103 

Production  order 72 

Productive  and  non-productive 

expenditures    79 

Profit    sharing 147 

Proprietor ;   rights  and  respon- 
sibilities of  the  individual...     59 
Psychological    factor   in   indus- 
trial   development 14 

Psychological  Lag  in  industrial 

advance  14 

Purchasing    department 51,  160 

Q 

Quantitative  problem  of  works 

management    39 

Quick  Assets 70 

R 
Raw    stores 52 


INDEX 


173 


Rough    stores 52 

Routing    problems    in    quantity 

manufacture    4° 

Rowan  premium   plan 128 


Schedules   as   a   factor   of   sci- 
entific management.  ..46,  134,  143 

Scientific  Management 46 

;  the  two 
leading 
schools 

of 47 

Selling 74 

Selling  expense 84 

Shares  of  a  corporation 66 

Shop  expense 84 

Shop  transportation. 163 

Specialization;  beginnings  of..     26 
countercheck   to 
ill  effects  of. ..     33 
interlocked  with 
aggregation  and 
standardization.     31 

Special  partnership 63 

Staff  and  line  contrasted 43 

Staff  organization 42 

Standardization ;  elementary  re- 
lations   of 28 

evil  conse- 
quences of...  32 

general   32 

in  te  rlocked 
with  aggrega- 
tion and  spe- 
cialization ...  31 

partial  29 

private    32 

Standards:  evolution  of 34 

Standard  times;  how  set  under 

various   systems 141 

Stockholders'    liability 67 

"Stock"  in  manufacture 52 

Stock;  sale  of  to  employees...   148 

Stock;  transfer  of 66 

Stock    tracing 52 

Stores 52 

"        systematic    arrangement 

of     162 

Stores     department ;     functions 

of  the 51,     73 

Stores  keeper;  duty  of  the....     51 
Stores  keeping;  arrangement  of 

sub-stores   ....   162 
frequently    i  n- 
eflficient    159 


Stores  keeping;  maximum  and 
minimum  lim- 
its in 162 

what  an  effi- 
c  i  e  n  t  system 
should  accom- 
plish    160 

Strikes  a  natural  sequence  of  a 
non-compensated   class    wage 

rate 1 16 

Subsidiary      companies ;      their 

purpose  and  relations 70" 

Supplementary  rate  in  expense 

distribution    102 

Supply  and  demand  a  variable 

ratio  13 

Surplus   70 

Symbolizing  of  stores 161 

System    49 


Task    idea    in    labor    manage- 
ment     136,  139 

Taylor  differential  piece  rate. .   133 

Taylor  system 47,  134 

Three-column   form  of  organ- 
ization        50 

Time;  irreplaceable  value  of..   119 

Time  keeping 53 

Time   study 145 

Tool  room 54 

Trade  union ;  see  Labor  Union. 
Transportation  of  materials...   163 
Trust  abuses  partly  transitory. .     24 
Trusts  inevitable 23 

U 

Unions;  see  Labor  Union. 
Unions;   why   forced  to   strike 
for  higher   wages 116 


Variable  expense 88 

Visualizing     industrial     opera- 
tions ;  value  of 5 

Vivifying  a  manufacturing  or- 
der         71 

W 

Wages;  contract  plan 125 

day 117 

distribution     of     e  x- 
pense  by 98 


INDEX 


Wages ;  Emerson    efficiency 

system    140 

Gantt  bonus  system. ..   135 
Halsey   premium    plan 

126,  138,  139 

piece-rate     120 

"         possible  advantages  of 
disproportionate      i  n- 

crease   in 114 

principle    involved    i  n 

increase  of 114 

proportioned  t  o  effi- 
ciency would  diminish 
one  cause  of  strikes..  116 

"        Rowan  premium  plan.  128 


Wages;  Taylor    differential 

piece    rate 133 

Wage  systems;  all  are  combi- 
nations of  day 
pay  and  piece 

rates  117 

;  what  is  sought 
by    advanced. .    116 

Welfare    work 149 

Work   dispatching 53 

Working  capital 69 

Works  design  much  influenced 

by    material 164 

Works   management ;    problems 

of    39 

Works  order 72 


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LIBRARY 


MAR  2  5  1946 

funy  1  5  lOAfi 

WOV  Zfi  1947 

APR 

<* 

rn-i*     -1          1QAQ    j- 

^ 

SEP  1     «"»/ 

O  ^  *f       f'\    o.      4  !     Af 

^^ 

OCT  2  0  1S^3r 

-SL/X 

£, 

. 

HtCli  1950JJL 

/ 

DEC  2  8  1950  j 

't 

/i  r  n    i   7     inqi    A^ 

!Trt\    I  ^     'yO'    *^ 

SEP  20  195l4,v 

JJS  ^^^ 

LD  21-100m-7,'40  (6936s) 

YC  32308 


